cost properly chargeable against production with the ex-
ception of direct material and direct labor.
3. Cost Determination
The cost of any manufactured article, as stated, is
made up of the cost of the three elements material,
labor, and expense which includes all indirect charges.
Direct material costs are usually simple, requiring
only the charge for material actually consumed. Labor
costs, while still comparatively simple, are more difficult
of determination, owing to the fact that labor does not
go into the specific order in the clean-cut way in which
material usually does. Thus, a single order may pass
through many different processes and departments and
through many different hands. It may be worked on
steadily until completed, or it may be continued at many
different times. It may be worked on alone, or in con-
nection with other jobs, or it may fill in time between
20 GENERAL PRINCIPLES
jobs. All this makes for complexity. Under any of
these circumstances, however, the problem is usually
merely one of careful timekeeping, and is therefore
capable of accurate solution.
It is in the determination and distribution of expense
that the chief inaccuracies and most of the difficulties in
both the theory and practice of cost-finding 1 occur. Ex-
pense comprises a large part sometimes the greatest
part of manufacturing costs. It is always present in
results, but is not easily traceable itself ; it is multifari-
ous in its origin but united when applied as a burden on
4. Illustrative Items of Cost
The following chart of cost accounts* is a further
illustration of the complexity of the expense charge.
This shows the items composing the manufacturing cost
in the paper pulp industry, these items being classified
under the three heads of material, labor, and expense.
It is interesting as showing the very great preponder-
ance of expense items.
CHART OF COST ACCOUNTS
I. DIRECT MATERIAL II. DIRECT LABOR
Wood Manufacturing labor
(I -j- II = prime cost)
Adapted from the report of the Tariff Board on the Pulp and News Print Paper
ELEMENTS AND PRINCIPLES
1. Works Expense:
Felts (wood, can-
Fuel (coal, wood)
(b) Water Power
(c) Repairs and Main-
(d) Direct Labor
(e) Administrative Ex-
(f) Miscellaneous Op-
(g) Accident Insurance
(h) Hauling and Stable
(I -f II -f 111 = total
2. Fixed Charges:
(b) Fire Insurance
(c) Taxes (excluding
tion tax, as this is
a direct tax on
profits and not a
cost in bulk at works)
The determination of the material and labor cost per
pound of paper pulp produced during a given period
is a simple procedure. Records are kept of the quanti-
ties of the six kinds of raw material listed above with-
drawn from the stores-room for the manufacturing needs
of the current period. The purchase price of these ma-
terials (plus the cost of delivery to the factory) divided
by the number of pounds of pulp produced gives the
material cost per pound. The total pay-roll for the
period divided by the same production figure gives the
labor cost per pound.
2 GENERAL PRINCIPLES
The expense or overhead cost is not so readily ascer-
tained. The value of the supplies consumed during the
period, like the value of the material, is readily arrived
at. A nice discrimination is required, however, to deter-
mine in what proportion the administrative expense is
chargeable to the cost of manufacturing and to the cost
of selling; or what charge should be made to production
for the wear and tear on buildings, machinery, and
equipment; or how major repairs, made as much for the
benefit of future production as for present, should be
treated. The expenditures to date for these numerous
items of expense must be clearly shown. Furthermore,
the books must show both the proportion consumed in
factory operations and the departments or divisions of
the factory which are responsible for or benefit from the
expenditure. While all this adds to the difficulties, yet
the division and subdivision and departmentalizing of
accounts is imperative if the cost accounting is to serve
its dual function of ascertaining and controlling costs.
Obviously, the greater the detail in which the causes
which lead to or create expenditures are analyzed, the
greater the degree in which they can be controlled.
5. The Cost Period
Accurate cost accounting to give cost information as
and when it is wanted is a modern development. In
former years the manufacturer waited until the end of
the fiscal year in order to determine his costs and his
profits. At that time an inventory was taken and the
cost of the product was determined with more or less
inaccuracy. Such procedure does not meet modern re-
quirements. If production costs vary, the fact must be
ELEMENTS AND PRINCIPLES 23
known, and known quickly, and the cause of the varia-
tion must be discovered. Accurate, up-to-date costs are
necessary as a basis for price-fixing whether competi-
tive or otherwise and price-fixing cannot wait on an-
To meet these requirements the annual cost period
has been replaced by a much shorter period in modern
accounting, usually a monthly or a four weeks' period.
At the end of the period accounts are balanced, and from
them a statement is prepared in such detail as is re-
quired, showing the stores on hand, the work which is
still in process and the costs which have accumulated
thereon, the work which has come out of process as
finished goods and the cost of the work. A statement
of loss and gain and a balance sheet are then prepared,
showing just what has been accomplished during the
period. The advantage of this short period with its fre-
quent complete showing of factory conditions is obvious.
It is highly desirable that the cost periods be ad-
justed so as to coincide with the pay-roll periods. The
most approved practice when employees are paid weekly
is to have the calendar year divided into quarters of
thirteen weeks each, beginning with a five-week period
followed by two four-week periods, or to have the year
divided into thirteen periods of four weeks each.
6. Stores Work in Process
The term "stores" covers supplies and material of
every kind used in the factory. When material is taken
from stores to be used in the manufacture of any product
or article and work is begun on this material, it becomes
"work in process" or "work in progress." As work in
24 GENERAL PRINCIPLES
process passes through the factory, labor is expended on
it, more material may perhaps be used in it, and ex-
penses of various kinds are incurred in connection with
its transformation from raw material into the finished
article or product. As long as any factory operations
are required for its completion, it is still "work in
7. Finished Product Finished Parts
When work in process is completed, i.e., when it has
gone through all the factory operations necessary to
convert it into the desired article or product, it becomes
finished product or finished goods. It is then ready for
sale, and, if not sold at once, is transferred to stock.
The factory, as such, loses interest in it from the mo-
ment it passes out of the work in process stage.
Finished parts are those which are fully completed
as parts but which are used in the manufacture or as-
sembling of a complete article, as the parts of a watch
or a sewing machine. These finished parts may be
manufactured for sale to other concerns which assemble
the complete machine, in which case they are, when ready
for sale, treated as "finished goods." If they are to be
used or assembled within the establishment, they are,
when completed, regarded as material and placed in
stores, just as they would be if purchased outside.
8. Manufacturing and Trading Costs
The records of purchases in a trading business in
which the unit costs of the goods may be ascertained
from the invoices are obviously much simpler than the
records of production in a manufacturing business in
ELEMENTS AND PRINCIPLES 25
which many more factors need to be taken into account.
Methods which might be adequate for a mercantile or a
trading business are entirely inadequate for a manu-
facturing concern. The difference between the cost
problems in the two cases becomes evident when the sell-
ing price of an article is analyzed into its constituent
parts, as follows:
1. Materials 1 ] Total
2. Direct Labor f P rime Cost I Factory
8. Manufacturing Overhead Expense I Cost
4. General Administrative Expense
6. Selling Expense
A mercantile business is not concerned with the
factory cost, because it buys its merchandise in a manu-
factured state. The accounts of the trading business
have therefore to deal with but four elements in deter-
mining its selling price, i.e., cost of merchandise pur-
chases, general administrative expense, selling expense,
and profit, and are obviously much simpler than those of
a manufacturing business which must deal with six.
1. What is the main function of a cost system?
2. Differentiate between direct and indirect charges.
8. Name several items properly chargeable to indirect expense.
4. What purpose is served by a minute classification of the items
making up the cost of a commodity ?
6. In what way is a monthly financial statement related to a cost
6. Does a trading concern need a cost system?
Cost Accounting Procedure
ROUTINE OF COST ACCOUNTING
1. The Cost Mechanism
The routine of cost-keeping will vary in almost every
factory. Differences in product, in conditions, and in
methods make it impossible for one plant to adopt suc-
cessfully the procedure of another. Through it all, how-
ever, there runs a thread of uniformity. Where costs
are kept at all, there must be a certain essential cost
mechanism which in a more or less complete form func-
tions as a part of every manufacturing operation,
whether for repairs, construction, or the conversion of
material into finished product. The more important
elements of the cost mechanism in a job order factory
are given below. The formalities found in a job order
plant in connection with issuing production orders and
drawing material on requisitions are to a large extent
dispensed with in a process factory.
1. An authorizing order, technically known as
the "Production Order," which starts work,
i.e., puts the particular job "in process."
2. The "Material Requisitions," which are orders
for the material needed and on which are re-
corded the cost of the material as a charge
against the particular job.
3. The "Time Tickets," which record the cost of
labor as a charge against the particular job
on which it is expended.
80 COST ACCOUNTING PROCEDURE
4. The "Expense Distribution Sheets," on which
are brought together the overhead expenses
of the factory so that a calculation can be
made of the amounts to be distributed to non-
productive and productive departments and
finally over each job.
5 . The "Cost Sheets," on which the costs of the ma-
terial, labor, and expense of each job are
brought together and combined to secure the
total cost of that job.
Other auxiliary forms and records are used in cost-
finding but those given are the essential records of the
cost accounting mechanism for a job order factory.
In a small repair shop, for instance, where formalities
are reduced to a minimum, most of these records are
found in some form. For example, an umbrella is
brought into a repair shop to have the old cover replaced.
The proprietor may perhaps turn it over to a workman,
telling him what to do. These instructions constitute a
Possibly, on examining the umbrella, the workman
finds a rib broken and the ferrule missing; also he may
not have the proper quality of silk to replace the cover.
He makes a memorandum of what is required and hands
it to the proprietor. This is a simple form of material
When the work is finished, the workman hands the
proprietor a memorandum of the time he put in on the
job, which is in effect a time ticket. To the cost of this
time, the proprietor adds the cost of material and, if he
is at all experienced in costs and price-making, adds a
percentage adequate to cover overhead expense. The
ROUTINE OF COST ACCOUNTING 81
cost data so secured give him, in effect, a cost sheet, and
the costs of labor, material, and expense added together,
plus an allowance for selling expense and profit, give
the proprietor the selling price in this case his charge
for repairing the umbrella.
2. Production Orders
The call for factory operations may spring from dif-
ferent sources. Perhaps the factory operates steadily,
the output being sold as fast as it is turned out, perhaps
the customers or salesmen send in their orders and the
product called for must be made to order; or certain
lines of stock may be nearly exhausted and a fresh sup-
ply is necessary; or some new design or new line of
manufacture is about to be undertaken.
Whatever may be the nature of their origin, how-
ever, all productive factory operations in a job order
factory are set in motion by means of written orders,
termed "Production Orders." Certain other forms of
factory activity, such as the care of buildings and re-
pairs, which do not go directly into production, are in
many factories started or authorized by means of
"Standing Orders," or, as they are sometimes called,
"Standing Expense Orders."
A production order is a written order authorizing
and giving more or less complete instructions for the
manufacture, usually within a stated time, of a certain
number and kind of articles, as 100 automobiles of a
particular type and size, or for some specific job, as the
printing of a catalogue or poster.
There is no uniformity of practice as to who author-
izes the production order. In a small plant the proprie-
COST ACCOUNTING PROCEDURE
tor, or superintendent, or foreman might initiate it. In
a larger concern some one of the corporate officials may
control factory operations and authorize production
orders, or this control may rest with the board of direc-
tors, while the actual order would probably be issued by
the planning department or a planning clerk.
OPERATORS CHANGE TIME TO NO.
MANUFACTURING ORDER SLIP
Date of M.O.S.
Source of Order.
Three samples must be filed in this envelope when order
Form 1. Production Order Job-Printing House
The form of the production order differs materially
in different factories. In some it is little more than a
brief order to produce certain articles. In others it
gives full details as to the required product and its con-
ROUTINE OF COST ACCOUNTING 33
struction. Sometimes it specifies the materials required.
Sometimes manifold orders are so arranged that one
copy is a production order, another copy a requisition
for material, while a third copy becomes ultimately
the final cost sheet. A simple form of production
order used in a job-printing house is shown in
Several copies of the production order are usually
prepared. One copy is retained in the accounting de-
partment; one goes to the factory probably to the
superintendent or to the foreman of the department in
which the production activity begins; one will go to the
clerk who keeps the cost sheets. If the article or product
is to go through several departments, a copy may be
sent to each of the department heads.
Production orders are numbered consecutively and
by means of this number manufacturing costs are easily
charged to the proper order. Every requisition for ma-
terial, every cost sheet, time card, and all other records
or reports relating to the particular order will always
bear the order number so that the accumulating costs
involved may be properly charged thereto.
In the ordinary "job order" factory, the foreman
usually has a number of "issued" production orders on
hand waiting to be put "in process," and, unless some
higher authority has prescribed to whom they are to go
and the order in which they are to be taken up, he may
use his discretion as to which workman or workmen he
will give a particular production order and just when
work shall begin. Before giving the production order
to the workman, the foreman will probably note the ma-
terial required and make out the necessary requisition.
COST ACCOUNTING PROCEDURE
He may then turn over to the workman both the order
and the requisition.
3. Requisition for Material
The "Requisition for Material" (Form 2) is an
order for material required for a particular job. The
requisition always bears the number of the production
order for which it is issued. In some cases where the
items of material required are numerous, or where de-
tailed instructions as to material are necessary, the requi-
sition takes the form of a "Bill of Material," which is a
detailed statement of the material required for the par-
ticular job (see page 135).
(Vlh/er tr> . . ftf
F find oblia
OODS BROTHERS COMPANY
To be Weighe
Form 2. Requisition for Material
When the workman receives his production order
and requisition for material, he procures the necessary
material from the stores-keeper, usually surrendering
ROUTINE OF COST ACCOUNTING
his requisition in exchange. He is then ready to begin
work. Further requisitions for material may be needed
from time to time as the work progresses. These he
usually procures from the foreman, again securing the
requisite material from the stores-keeper. All the ma-
terial used is charged against the job, the requisition
furnishing the needed information as to quantity and
cost, and supplying the number of the order to be
4. Time Tickets
The "Time Ticket," "Time Card," or "Time Re-
port" (Form 3) is a more or less detailed statement of
the manner in which the workman has expended his
time. The method of keeping time varies materially in
Date Approved by
6 VA 56 3 A
7|Ji|54 % 8 %
A % 9|K 'A K 10 Ji K % 11 K J4|% 12
12 /* "A %
1 | /4 | 'A % 2 %
/ 2 % 3 '/4 'A % 4 'A %. % 5 J4 'A\*/4 6
i I ~i
Hours Reces Rate Value
Form 3. Simple Form of Time Ticket
different factories. In some cases the "in and out" rec-
ords of a time clock are sufficient. In other cases, where
the workman devotes his time to several different jobs
36 COST ACCOUNTING PROCEDURE
in the course of the day, such a record would be inade-
quate. A more detailed statement of how his time has
been expended then becomes essential to accurate cost-
keeping. Again, individual job cards may be used to
report the time expended on each order, or one time
ticket may show the time put in on several jobs. In all
cases, however, the time ticket should show the number
or numbers of the job or jobs upon which the workman's
time has been expended.
On the accuracy of the time report depends the accu-
racy of the labor costs. The time tickets should show
the actual number of hours expended on each order or
chargeable to some expense classification. From these
tickets are obtained the information necessary for mak-
ing up the pay-roll, the data for figuring the labor cost
on each job, and also the amount chargeable to overhead
expense for indirect labor. To sum up, the time tickets
turned in by any one workman should give his complete
time history so far as the factory is concerned.
5. Expense Distribution
The expense items which cannot be charged directly
against a particular product are distributed over the
production departments, which in their turn charge the
products passing through them or upon which they
work, in proportion to the amount of work done. The
distribution of expense over departments, and of the
department expense totals over the product, is one of
the most technical phases of cost accounting, and is dis-
cussed in detail in subsequent chapters. For the present
it is sufficient to say that the distribution of the overhead
expense items over departments is made on an "Ex-
ROUTINE OF COST ACCOUNTING
38 COST ACCOUNTING PROCEDURE
pense Distribution Sheet" (Form 4) and that the
method of distributing the department totals over pro-
duct is determined by the circumstances in each case.
The expense distribution sheet furnishes the necessary
analysis of the expense as a basis for calculating the
charges to product.
The expense distribution sheet is kept either by the
cost clerk or by the accounting department. The items
entered on it are derived from various sources from
material requisitions for indirect material, such as
brooms, dust-cloths, soap used for washing windows,
and tools for general use ; also from time tickets for in-
direct labor, such as janitor service, trucking, and gen-
eral clerical assistance. Other items such as rent, depre-
ciation, and taxes come from the general books of
6. Cost Sheets
The cost sheet is individual to the particular job, i.e.,
each order must have its own cost sheet bearing its num-
ber and showing the charges accumulated against it. The
cost sheets often called the "cost ledger" are usually
kept by the cost clerk in the accounting office. After a
job is finished, the cost sheet for it is summarized and at
the end of each month a total is made of the cost of all
jobs finished. The cost sheets in a process factory,
which are operated in connection with the general book-
keeping system, analyze the factory expenditures each
period according to kinds of product.
A simple form of cost sheet used in a jewelry fac-
tory is shown in Form 5.
As requisitions for material come in showing the
ROUTINE OF COST ACCOUNTING
40 COST ACCOUNTING PROCEDURE
material used on a particular order, and as time tickets
accumulate showing the time expended on this order,
the cost clerk enters these items on the cost sheet
bearing its order number. To these charges he adds
the proper expense charge based on rates determined
from previous experience. When the operations on the
particular order are completed and all charges against
it are entered on the cost sheet, he totals the detailed
charges to find the manufacturing cost of the product.
When the manufacturing operations on an order
are completed, the "work in process" becomes "finished
goods." The cost of these finished goods is taken from
the cost sheet, and the figures thus obtained are charged
off the factory records and entered on the stock books
under "Finished Goods," "Stock," or "Finished Mate-
1. Name the main features of any cost system.
2. What function is served by production orders?
3. How is production usually set in motion?
4. How is the issue of material controlled?
5. What time records are needed in a job order cost system?
6. In what way is the pay-roll system related to the time tickets
used for cost work?
7. From what main sources does the information regarding over-
head expense come?
8. How is a cost sheet operated?
9. What is the accounting procedure when the manufacture of
the goods is finished?
COST ACCOUNTING METHODS SIMPLE
1. Order and Process Methods
For cost accounting purposes, as already stated,
manufacturing methods may be broadly divided into two
1. The order method, or job order method, under
which goods are made in distinct units or lots
so that an order may be followed through and
identified from start to finish.
2. The process method, under which production is