The special feature of the manifold system above
described is the provision for giving at one writing the
data of the production order on the various forms used.
4. Production Controlled by Coupon Order
The routine of production in a shoe factory repre-
sents a further stage of complexity occasioned by the dif-
ficulty of computing the cost of material and by the
numerous processes through which the product passes.
A pair of shoes is said to undergo more manufacturing
operations than any other machine-made article sold
within its range of price.
When a customer's order is received, say for twenty
cases of shoes of various kinds, a production order,
known in the industry as a "Shoe Tag" (Form 9a) is
made out for each case of shoes wanted. The upper part
of the tag or "Workroom Ticket" gives full details as
METHODS COMPOUND PRODUCTS
59
WORK .ROOM TICKET
|
m
1.
i
b" ET
3-
E
COUNTERS
!
r?
1-
1
t.
r
1
y
<
$ -
I
iM
Onartpi-5
\/,mnS F^v
3 1
?
F I
i
= 8
r
r
1
fi
5'5
>
I
I
$
Jj
7-e
_
? f
.
If
f
F
1
a
Cover
r
5?
1
O
S-
*
I
Cutter
Rale
Amount
WfeltTrim
Rate
Amount
78c
Setting Shanks
Rote
Am
)unt
Tack Puller
Rate
Aff
ount
EdgeSetter
Rate
Amount
No. 5 Laster
Rate
Amount
2/2
Cdge Trimmer
Rate
Am
junt
Rex Laster
Rate
Arr
ount
Heeler
Rate
Am
unt
Laster
Rate
An-
ount
Heels
Rate
Am
3unt
Last
Pr.
- .
Amount
nsde
Counters
Leveller
Rate
V4
Am
Dunt
Boxes
Shanks
Tot.
Mfg. Findings
Rate
Am
)unt
fitting
Rate
Arr
ount
Bottom Filler
Rat?
Amount
Lin ng Cutter
Rate
Amount
9c
Soles
Iron Last
Rate
Am
aun :
Trim Cutter
fete
Arr
ount
Welt Beater
Rate
Amount
Out. Cutter
Rate
Amount
40c
Form 9. (a) Production Order with Coupons
(face of Shoe Tag)
60
COST ACCOUNTING PROCEDURE
Na
DATE
PAIR
Office Examined
Cutter
Trimming Cutler
Fitted
Last Picker
Lester
No. 5 Laster
Tack Puller
WeHer
Welt Trimmer
Shanks
Bottur'n Filter
Sole Layer
Rounder
SWcher
Loose Nailer
Leveller
Heeler
Heel Trimmer
Edge Trimmer
Fipisher
Cleaning
Form 9. (b) Labor Summary (reverse of
Shoe Tag)
to style, the quantity being understood to be one case for
each ticket. The lower part of the ticket consists of cou-
pons a coupon for each operation in its due sequence.
Most of the productive labor in the making of shoes
is paid for at piece rates a definite rate being paid for
each operation performed on a given number of parts or
semi-finished shoes. Therefore, the coupons attached to
the workroom ticket serve three useful purposes :
1. Furnish operatives and manufacturer with a
record of work done.
2. Serve as vouchers for the payment of wages.
METHODS COMPOUND PRODUCTS 61
3. Serve as a record of the labor cost to be charged
to orders.
Furthermore, as the tag accompanies the work and
as a coupon is detached for each operation finished, the
foreman is kept informed of its progress, since the num-
ber of coupons still attached to the tag represent the
operations that have yet to be performed before the order
is completed. The piece-work prices are entered on the
coupons attached to the tag.
The back of the ticket, as illustrated in Form 9b,
provides a place for the operatives to enter their clock
numbers, dates, and pairs worked on, at the time they
tear off coupons. This information is needed for the
benefit of the foreman when investigating defective
work.
5. Procedure under Coupon Order Method of Production
Ordinarily each shoe tag or workroom ticket ( Form
9a) calls for one case of shoes and as many tags are made
out as there are cases in a customer's order. The reason
for thus splitting up production is to make the work flex-
ible, so that each department can be supplied with the
right number of tags to keep it busy. After the tags are
prepared by the production clerk, they are placed in a
box or holder where they await the attention of the su-
perintendent of the factory, whose business it is to issue
them.
The "uppers" of the shoes are prepared in one de-
partment, the soles in another, the two are combined in
a third, the heels are attached in a fourth, and so on.
Each morning the superintendent selects sufficient or-
62 COST ACCOUNTING PROCEDURE
ders for a full day's work for all departments; the pro-
duction capacity of each, measured in cases, being
approximately the same. This is designedly so, as un-
equal capacity would result in unbalanced operation,
some departments lacking work while others would be
overcrowded.
When the day's orders have been selected, they are
entered on a "Day's Work Sheet," representing one
day's work for all departments. This is made out in
manifold so that each operating department may have
a copy.
The work laid out goes to the department perform-
ing the first operation and must be completed that day,
so that the following day it may be passed on to the next
department. If at the end of the day a department has
failed" to finish its schedule, either it must be completed
by overtime work, or the uncompleted orders are struck
off that department's day's work sheet and added to the
sheet of the next day. After all the tags or orders on a
department's work sheet are finished and checked off, the
sheet and tags with the coupons belonging to that de-
partment detached are returned to the superintend-
ent's office.
In this way a close watch can be kept on the progress
of orders day by day, by departmental operations and as
a whole, and work can be fed to the departments in quan-
tities equal to the maximum capacity of the factory.
Should any department fall behind in its working sched-
ule, this fact is automatically brought to the attention of
the management. This scheme of scheduling produc-
tion can be used to advantage in almost any standard
product factory.
METHODS COMPOUND PRODUCTS 63
6. Estimated Costs
An interesting feature of shoe manufacture is the
method of ascertaining the material charge a method
which is in general use in industries where the material
cost of the same product may fluctuate, sometimes
widely, on different orders. The accurate calculation in
advance of the actual cost of the leather to be used in
any particular lot of shoes is practically impossible, as
the skins vary in size and price and any carelessness in
cutting, or work spoiled from other causes, at once adds
materially to the cost of material and falsifies the cal-
culation. To meet this situation, the shoe patterns are
measured and in this way the approximate quantity of
leather required for a certain number of pairs of shoes
of a given size is obtained. The cost of this leather is
estimated at an average price based on experience and a
knowledge of leather prices, and this estimated cost is
charged against the order regardless of the actual cost
of the leather used.
This method gives a standard uniform price for ma-
terial upon which prices to customers may be based with
a fair degree of safety. It also gives a check against
waste of material and against any carelessness or ineffi-
ciency in the cutting up of the skins, since the requisi-
tions for material will at once show the real cost of the
leather and enable a comparison to be made between the
real and the estimated costs.
The estimated cost of the leather may or may not
equal the actual cost of the leather used, but the varia-
tion, so far as the particular case of shoes is concerned,
is not important. Its selling price was fixed when the
customer's order was accepted and cannot be varied to
64 COST ACCOUNTING PROCEDURE
meet fluctuations in the price of materials. For this
reason, it is not important to charge any variation of
material cost against a particular case of shoes.
But differences cannot be ignored. The requisitions
for materials will show just what the leather costs. A
cost which is higher than the estimate but which is clearly
due to a rise in the price of skins, does not directly con-
cern the factory. If the higher price is permanent, the
price of the shoes must be advanced or the margin of
profit will be lessened, and the problem is one for the
management. If, however, the higher price of the shoes
is due to waste of material or to spoilage, it of course in-
dicates carelessness and inefficient work in the factory.
As the material cost is estimated and the labor cost
(based on piece rates) is also known in advance, the cost
department can figure the total cost of any order as soon
as the specifications are drawn. When the shoe tags and
material requisitions relating to a particular order are
received in the office, the actual figures can be compared
with the estimated figures. Any rise or fall in actual cost
can be noted and, if it is an increase, it is easily traced
either to the higher price paid for material, to defective
material, to accidental losses, or to inefficiency in han-
dling material.
Any difference between the estimated cost of mate-
rial and the actual cost as shown by the requisitions for
material is adjusted at the end of the cost period on the
general ledger by means of a "Loss and Gain on Esti-
mate" account, which is debited with the actual material
cost and credited with the estimated cost of the material
used. Any excess on the credit side of the account shows
the amount charged in excess of actual cost, while any
METHODS COMPOUND PRODUCTS 65
excess on the debit side shows the amount by which the
actual charges have increased above the estimated cost.
7. Estimating Cost Systems
There are many industries in which the routine of
production corresponds in its essential features to that
of shoe manufacturing. The "needle" industries, for
example, pay for at least part of the work at piece
rates and find it practicable to estimate the material costs
from the cutting patterns before production begins.
Similar methods are used in industries where the small
intrinsic value of the product makes it impracticable to
find the costs on orders or lots of goods separately the
cheap jewelry, notion, and leather goods industries being
cases in point. In these trades most of the productive
work is paid for by the piece, and this cost as well as the
material cost can be estimated with fair accuracy. In-
stead of splitting up production into a number of small
units, as in the shoe industry, costs are first estimated on
large quantities and records are kept of the actual ma-
terial and labor cost incurred in manufacturing these
quantities. This method controls wastage and encour-
ages efficiency by setting standards above which costs
are not expected to rise. Incidentally, this method
greatly reduces the work of the cost department.
The limitation of the system of estimating costs is
found in the fact that as costs are usually obtained by
groups or classes and not by items, the unit costs cannot
be analyzed and it becomes difficult to trace the cause
of fluctuations to individual costs if the actual cost of a
group or class proves to be higher than the estimated
cost. ( See Chapter XXVI. )
66 COST ACCOUNTING PROCEDURE
8. Cost-Finding for Multiple Parts Products
The manufactured articles so far considered, though
they may vary in substance, weight, and design, have one
thing in common in their finished state either they con-
sist of one piece or they are made into one permanent
article by the assembling of a few simple parts. This
simplicity of design permits instructions to be issued for
their manufacture as a whole. When, however, an ar-
ticle is made up of several distinct parts, the cost of each
part or lot of parts is usually obtained separately, as the
utility of the figures so obtained is far greater than if
only the cost of the article as a whole were found.
A machine, for instance, may contain hundreds of
parts, some of these parts may be forged, others cast,
others cut from the bar or sheet, and on each of these
parts many kinds of machine and hand operations may
be performed. If a production order were issued for a
dozen such machines,, it would be comparatively simple
to find their cost if no effort were made to determine the
cost of the different parts. Cost-keeping requirements
could then be covered by recording the value of all stores
withdrawn for the order, the amount of direct labor
chargeable against it, and the proper proportion of over-
head expense. This would give the total cost of the
dozen machines from which could be determined the cost
price of each machine, and if the machines were sold at
a reasonable advance over this cost a satisfactory profit
on the dozen machines would result.
But suppose it is found that the machine cannot be
sold at a profit because its cost is altogether too high.
The "lump sum" cost figures would then be compara-
tively worthless in determining the possibility of cutting
METHODS COMPOUND PRODUCTS 67
down the manufacturing cost. The labor cost may be
$500, but fifty workmen may have been engaged in the
manufacture of the machine; some of them may have
been inefficient, but this cannot be determined from the
record. The material may have cost $400, but the record
does not show that the many different materials were
bought at a fair price, or that there was no undue waste
or misappropriation.
Moreover, if the cost of one of these machines is com-
pared with that of another made in a former period,
there exists no adequate basis for the comparison. The
machine of the first period may perhaps have cost $900
and that of the later period $1,000, but it would be im-
possible to say just where and why the higher cost of the
second machine was incurred. It might be found, on in-
vestigation, that the difference was in the labor charge,
but the mere fact that 1 the labor cost was $500 on the
first machine and $600 on the second, though of value
in itself, would not give the detailed basis for determin-
ing the labor cost differences that the situation requires.
For this the detailed cost of each component part is
essential.
9. Component Parts Orders
When parts are made in quantity and placed in
stores for later use in assembling complex mechanisms,
they are manufactured under an independent production
order and when completed are placed in general stores
or "finished parts" stores. When the more complex
mechanism is to be assembled or constructed, its produc-
tion order is issued and the finished parts are secured by
regular requisition.
68 COST ACCOUNTING PROCEDURE
When, however, a complex mechanism is to be
manufactured in lots the component parts manufac-
tured and the machine assembled a main or master
production order is issued for the mechanism as a whole
and suborders are issued for the component parts.
These component parts orders bear the same order num-
ber as the main production order. When the parts are
completed, instead of going into stores, they are routed
to the assembling room where they take their place in
the make-up of the complex mechanism.
During production the shop routine through which
one of these component parts orders passes is exactly
the same as that involved in the manufacture of any
single-part product. The cost of each different part or
lot of parts is found separately on its own cost sheet, and
the total cost of the complex mechanism is arrived at by
adding together the cost of its parts. It is obvious that
under this plan any desired detailed statement of the
cost of any of its parts or any combination of parts can
be obtained without difficulty.
10. Complex Production
In a factory manufacturing a complicated mechan-
ism, such as an automobile, the number of parts runs far
up into the hundreds or even thousands, and a score or
more of supplementary records may be needed to con-
trol the flow of material and the parts of processed work
from one department to another and to regulate produc-
tion as a whole. All this, together with the keeping of
detailed costs, involves a bewildering complexity of rec-
ords. Through it all, however, are always to be found
in some form the factory production orders, giving the
METHODS COMPOUND PRODUCTS 69
necessary working instructions; stores requisitions or
material sheets, giving the required material and its cost ;
shop time tickets or piece-work slips, giving the labor
cost; expense sheets, distributing general overhead; and
a job cost sheet summarizing the total cost of the par-
ticular order.
REVIEW QUESTIONS
1 . What kind of production and cost system best meets the needs
of a hat factory?
2 . Outline a good method for checking piece-work.
3 . How is the production of each day's work controlled in a shoe
factory ?
4. How are leather costs estimated on shoes?
5 . How are variations in material costs controlled in shoe factories ?
6. What purpose is served by estimating costs?
7. How can cost estimates be controlled?
8 . What is the production routine in assembly industries ?
9. How are costs figured in assembly factories?
Part III
Relation Between General Ledger
and Cost Accounts
CHAPTER VI
FINANCIAL AND COST ACCOUNTS
1. Financial Accounting and Cost Accounting
The comprehensive term usually applied to the ac-
counting for a trading concern is "financial" accounting;
that applied to the accounting for a factory is "cost" ac-
counting. As a matter of terminology the distinction
is not accurate, because a non-manufacturing business
can and should determine certain costs, e.g., cost of
purchases, cost of selling, and cost of administering the
business; and the manufacturing business must keep
the usual financial records as well as its cost records.
The distinction would be more clearly defined by term-
ing the cost records of factory activities, "manufactur-
ing cost accounting."
The cost accountant employs the usual double-entry
method of recording. In the case of both financial and
cost accounting, ordinary accounting principles and
procedure are adapted to the special needs of the par-
ticular business. If a particular kind of article is pur-
chased for a mercantile establishment, its accounts
merely record the facts in regard to the purchase and
sale of the article. If, however, raw material is pur-
chased for a manufacturing concern, the cost accounts
go much further. They show the stock on hand, how
much has been used in the production of a definite quan-
tity of goods, and in which departments it has been con-
sumed. How necessary this kind of information is for
73
74 GENERAL LEDGER AND COST ACCOUNTS
the proper management of a business and how complex
the keeping of cost accounts becomes, will be realized
from the fact that in one well-known and highly organ-
ized industrial plant of this country, there are 158 dis-
tinct departments, in each of which accounts are kept,
the total of these departmental accounts aggregating
over 3,000.
2. Cost Accounting for Trading Concerns
Most trading organizations run their accounts with-
out an attempt to charge and distribute costs to definite
units of goods sold or on the basis of service given.
Nevertheless, an examination of their profit and loss
statement when the accounts have been kept on the
double-entry basis, will show that a fairly accurate cost
analysis may be made. When this analysis is developed
to a point where it shows the cost of securing, handling,
or selling a certain unit of merchandise, it becomes cost
accounting as truly as if the enterprise were a manu-
facturing company.
3. Manufacturing Cost Procedure
The cost, or factory records are only an adjunct to
the general books of account. They are kept for the
purpose of analyzing the production costs. Materials
are sent from the stores into the factory. An inven-
tory record of them, which may be designated as an
"in process" record, is kept both in the factory and in
the general office. The record in the general ledger
controls that of the factory ledgers. The goods which
result from the manufacturing processes consist of a
certain amount of material that went into process, plus
FINANCIAL AND COST ACCOUNTS 75
a certain amount of labor and expense. A record must
be made of the labor costs incurred at each step or stage
in the process of manufacture, and a fair proportion of
the overhead must be added to the material and labor
costs, so that when the selling price is fixed the complete
costs will be taken into consideration. A finished goods
inventory record both in the factory (in detail) and in
the general office (in total) is made after the manu-
facturing processes are completed.
The whole matter of the control of the cost accounts
on the general ledger hinges upon the proper mainte-
nance of running inventories, each representing the cost
value of goods on hand in various stages of comple-
tion in the factory, so that at any time by closing the
records the true financial condition may be ascertained
without the necessity of a physical inventory. A
physical inventory is still taken periodically for the pur-
pose of checking the accuracy of the book inventories
and for the purpose of preparing annual financial state-
ments.
4. Factory Records Controlled by the Ledger
As already stated, the manufacturing cost of every
product consists of the cost of the raw material used in
its production, the cost of the labor expended upon it,
and all expenses incident to the transformation of the
raw material into the finished product. Raw material
is the beginning, and finished goods the end of factory
operations.
In the routine of production between the beginning
and the end the material is worked upon in various ways
or, as technically stated, is "in process." While in proc-
76 GENERAL LEDGER AND COST ACCOUNTS
ess, its value is enhanced by labor, power, heat, tools,
equipment, supervision, etc., expended upon it, and until
it emerges as "finished goods" these active charges
steadily add to its cost. When the work in process is
finally transformed into "finished goods," the only fur-
ther costs that accrue against it are the charges for
storage, insurance, etc., until the goods are sold, when
the final charges for selling and delivery complete its
active accounting history.
Material is thus found in three stages in the routine
of manufacture as :
1 . Raw material
2 . Work in process
3 . Finished goods
Corresponding to these three stages the factory rec-
ords are divided into the following three groups or
classes :
1 . Those which present an inventory record of raw
material and supplies.
2. Those which present an inventory record of
work in process.
8 . Those which present an inventory record of the
finished product.
There is usually a factory ledger in each of these
groups, each ledger being controlled by an account on
the general ledger. These ledgers are :
1 . The stores ledger, which records the receipt and
the withdrawal of the various kinds of
material.
2. The cost ledger, which records the income and
FINANCIAL AND COST ACCOUNTS 77
outflow of work in process and shows the
charges accumulated on this work while it
is in process.
3 . The stock ledger, which records the income and
outgo of finished goods.
The stores and stock ledger forms are illustrated by
Forms 10 and 11. These ledgers generally consist of
files of index cards so that the items of stock may
readily be referred to and classified in any desired way.
The cost ledger is usually composed of the file of current
job cost sheets on which the charges for material, labor,
and overhead are entered as incurred and subsequently
summarized.
There may, of course, be many accounts in each of
these ledgers. A hundred or more kinds or qualities
of raw material may be carried in stock, and an account
must be kept with each; many different orders may be
in process at the same time, and each must have its
own individual cost sheet; the kinds of finished articles
may be numbered by the score, and each kind must have
its own account.
5. General Ledger Controlling Accounts