Jerome Lee Nicholson.

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COST ACCOUNTING

THEORY AND PRACTICE



BY

J. LEE NICHOLSON, C.P.A.

OF J. LEE NICHOLSON & CO., CERTIFIED PUBLIC ACCOUNTANTS;
FACTORY COST SPECIALIST ; AUTHOR OF "FACTORY
ORGANIZATION AND COSTS" AND "COST ACCOUNT-
ING"; INSTRUCTOR IN COST ACCOUxNTING
AT COLUMBIA UNIVERSITY



RONALD ACCOUNTING SERIES



NEW YORK

THE RONALD PRESS COMPANY

1913



■'■,^^-



COPYRIGHT, 1913.

BY

THE RONALD PRESS COMPANY



6in£ral Stattm^nt jof ^bitorial §oartr



Applicable to all books of the
Ronald Accounting Series



THE manuscripts of the books forming the
Ronald Accounting Series have been sub-
mitted to us and have been approved by us for
publication.

In some cases the authors express views that
are not fully in accord with those entertained by
us. but in no instance are such differences of
sufficient importance, in our judgment, to warrant
the withholding from publication of a meritorious
work.

J. E. Sterrett

Robert H. Montgomery



290043



PREFACE

Considering the number of books that have been written
on cost accounting within the last four or five years, it may
be appropriate to give some reason for adding another to
the fast-increasing hst.

In this vohime the author's main purpose is :

( 1 ) To provide for the pubHc accountant and cost
accountant a reference book deaHng in a direct manner with
the practical parts of cost accounting.

(2) To present the principles and methods of cost
accounting in a simple and direct manner, so that the
student may be able to grasp them quickly, unhampered by
dissertations on organization, efficiency and the importance
of cost accounting generally.

(3) To furnish the manufacturer with a work contain-
ing all the important practical points in connection with
cost accounting, summarized and briefly explained.

It is not the author's intention to present this work as
a reference book dealing with factory organization and effi-
ciency methods, or to undertake to present all that might
be said on the subject of costs. On the contrary, while
omitting no cost details of importance, it has been his aim
to reduce to a minimum, so far as language is concerned,
the explanations and descriptions essential to a clear presen-
tation of the workings of cost accounting.



The author takes pleasure in acknowledging his indebt-
edness to Mr. John F. D. Rohrbach, B.C.S., New York, for



PREFACE

the preparation of the four system charts in this book, and
to Mr. Newman D. Waffle, M.A., for carefully reading and
criticizing the manuscript.

J. Lee Nicholson.
New York, September i, 19 13.



CONTENTS



Chapter I. Cost Finding and Its Functions

Various Phases of Efficiency Progress

General Functions of Cost Accounting

Cost Accounting as Related to General Accounting

Functions of a Cost System

Application of Cost Principles

Chapter II. Elements of Costs

Direct Charges

Indirect Charges

Indirect Expense

Items Composing the Indirect Expenses

Rent, Taxes and Insurance

Depreciation, Maintenance and Repairs

Power Costs

Small Tools

Experimental Work

Over, Short, and Damage

Interest

Production Costs and Selling Costs

Administrative Expenses

Relation of Cost Elements to Selling Price

Chapter III. Interest in Its Relation to Cost

Should Interest Be Included in Cost?
Interest as a Charge Against Costs
Interest a Profit — Not a Cost
Bibliography

VII



VIII CONTENTS

Chapter IV. Principles and General Methods of Cost Finding

Calculating Costs

Applying Cost Charges

Machine Cost Method

Types of Systems

Analysis of Operations

Direct Production Departments

Material Costs

Labor Costs

Distribution of Indirect Expenses

Chapter V. Methods of Distributing Indirect Expenses

1. Direct Labor Cost

2. Direct Labor Hours

3. Direct Labor and Material Cost

4. New Pay Rate

5. Old Machine Rate

6. New Machine Rate

7. Fixed Machine Rate
Miscellaneous Methods



Chapter VI. Wage Systems

L Day Rate

2. Piece-Work

3. Differential (Piece) Rate Plan

4. Premium Plan

5. Bonus Plan

5a. Gillette and Dana Bonus Plan

5b. Differential Bonus Plan

5c. Gantt System

5d. Sundry Bonus Systems

6. "Stint" System

7. Contract System and List Percentage System
8-9. Profit Sharing and Stock Distributing



Chapter VII. Recording the Material and Labor Costs



Requirements of Cost Finding
Recording the Material Cost
1. Purchase Requisition



CONTENTS

2. Purchase Order

3. Material Received Sheet

4. Stock Record — Raw Material

5. Production or Factory Order

6. Material Requisition or Rill of Material

7. Inventory Test
Recording the Labor Cost
Requisites of Time Reports
Forms of Time Reports

Daily Time Report (Forms 26, 27)
Weekly Time Report
Daily Time Report (Form 29)
Daily Time Record (Forms 30-33)
Self-Figuring Time Card



Chapter VIII. Compiling the Cost Data

Records and Forms Generally Used

Purchase Journal

Accounts Payable Voucher

Register of Accounts Payable

Material Received Summarj'

Report of Material Delivered

Pay-Roll

Analysis of Pay-Roll

Statement of Factory Expenditures

Process and Machine Cost Records

Production Report or Production Summary

Defective Work Report

Cost Sheets

Record for Part-Finished and Finished Stock

Billing and Shipping Records

Credit Certificate

Register of Sales and Costs

Cost Journal

Operating or Factory Ledger

1. Raw Material and Supplies Account

2. Labor Account

3. Indirect Expense Account

4. Work in Process Account

5. Part-Finished Stock Account

6. Finished Stock Account

7. General or Private Ledger Account
Illustrative Journal Entries



X CONTENTS

Chapter IX. Control of the Cost Records by the Financial Records

Methods of Controlling Cost Records

Sales Accounts

Selling Expenses

Administrative Expenses

Monthly Profit and Loss Statement

Balance Sheet

Salesmen's Costs

Plant and Tool Records



Chapter X. The Examination of a Plant

Reasons for Examination

Procedure

Raw Material and Storeroom

Power, Machinery and Processes

Labor

Indirect Expenses

Efficiency

Organization

Mechanical Aids

Ventilation

Leaks

Summary

Details of Examination Information

1. Purchase Division

2. Receiving Department

3. Storeroom

4. Dry Kilns

5. Power Department

6. Manufacturing — General

7. Manufacturing Departments

8. Repair Department

9. Foundry

10. Plating-Room

11. Wood-Working Shops

12. Assembling

13. Packing Department

14. Shipping Department

15. Sales Division

16. General



CONTENTS

Chapter XI. Devising a Cost System

Co-operation of Management and Employees

Fitting the System to Existing Conditions

Red Tape

Reports for Executives

Cost Period

General Outline of Systems

Estimating Cost Systems

Departmental System

Special Order and Product Systems

Charts of Cost Systems

General Description of Entries

Subsidiary Records

Method of Control

Forms and Designs

Chapter XII. Estimating Cost Systems

Purpose and Kinds

Advantages

First Plan of Estimating Costs

Schedule of Estimated Costs

Inventory Sheet

Analysis of Cost of Sales

Verification Under First Plan

Second Plan of Estimating Costs

Purchase Journal

Pay-Roll

Verification Under Second Plan

Third Plan of Estimating Costs

Schedule of Estimated Costs

Inventory Sheet

Analysis of Cost of Sales

Purchase Journal

Material Requisition

Summary of Material Requisitions

Time Report

Pay-Roll

Verification Under Third Plan

Profit and Loss Statement



xu CONTENTS

Chapter XIII. Departmental Systems

Departmental and Estimating Cost Systems

Scope of the Departmental System

Conditions Where Applicable

Methods and Principles

Forms Used

Purchase Journal

Factory Order

Bill of Material

Time Report

Analysis of Pay-Roll

Register of Sales

Department Accounts

Work in Process Method



Chapter XIV. Special Order System Based on the Productive
Labor Method

Introduction

Purchase Requisition

Purchase Order

Report of Material Received

Purchase Journal

Stock Record — Raw Material

Production Order and Cost Sheet (a)

Material Requisition

Report of Material Delivered

Employees' Time Report

Pay-Roll

Production Order and Cost Sheet (b)

Stock Record — Finished Product

Bill and Shipping Order

Credit Certificate

Register of Sales and Costs

Inventory Test



Explanation of Chart and Summary of Entries
Subsidiary Forms and Records
Method of Control
Profit and Loss Statement
Balance Sheet



CONTENTS XI

Chapter XV. Special Order System Based on the Process or
Machine Method

Purchase Requisition

Purchase Order

Report of Material Received

Accounts Payable Voucher

Register of Accounts Payable

Stock Record — Raw Material

Production Order and Cost Sheet

Material Requisition

Report of Material Delivered

Employees' Time Report

Pay-Roil

Analysis of Factory Expenditures

Process Card Record

Power Cost and Distribution

Production Order and Cost Sheet

Other Forms Used

Explanation of Chart and Summary of Entries

Subsidiary Forms and Records
Method of Control
Factory Ledger Accounts



Chapter XVI. Product System on the Productive Labor Method

Purchase Forms

Report of Material Received

Accounts Payable Forms

Stock Record — Raw Material

Production Order

Material Requisition

Report of Material Delivered

Employees' Time Report

Pay-Roll

Defective Work Report

Factory Ledger

Statement of Factory Expenditures

Summary of Production and Costs

Stock — Finished Product

Other Forms Used



XIV CONTENTS

Explanation of Chart and Summary of Entries
Subsidiary Forms and Records
Method of Control

Chapter XVII. Product System Based on the Machine or Process

Method
Production Order
Employees' Time Report
Pay-Roil

Analysis of Pay-Roll
Analysis of Factory Expenditures
Forms for Applying Costs
Production Report
Cost Sheet
Other Forms Employed

Explanation of Chart and Summary of Entries
Subsidiary Forms and Records
Method of Control



FORMS
Chapter XVIII. Forms Relating to Material

FORM

1. Purchase Requisition

2a. Purchase Order (original)

2b. Purchase Order (duplicate)

2)0. Report of Material Received (original)

Zb. Report of Material Received (duplicate)

4a. Report of Material Received (original)

Ab. Report of Material Received (duplicate)

5. Purchase Journal

6. Purchase Journal

7a. Accounts Payable Voucher (face)
7b. Accounts Payable Voucher (reverse)
8(?. Accounts Payable Voucher (face)
8/;. Accounts Payable Voucher (reverse)
9a. Register of Accounts Payable (left)
96. Register of Accounts Payable (right)

10. Raw Material Stock Record

11. Raw Material Stock Record

12. Raw Material Stock Record



CONTENTS
Chapter XIX. Production Orders and Requisitions

FORM

13. Factory (or Production) Order

14. Factory (or Production) Order

15a. Production Order and Cost Sheet (original)
15b. Production Order and Cost Sheet (duplicate)
16a. Production Order and Cost Sheet (original)
16&. Production Order and Cost Sheet (duplicate)
17a. Factory or Production Order (original)
17b. Factory or Production Order (duplicate)

18. Material Requisition (Bill of Material)

19. Material Requisition (Bill of Material)

20. Material Requisition (Bill of Material)

21. Material Requisition (Bill of Material)

22. Material Requisition (Bill of Material)

23. Material Requisition (Bill of Material)

24. Summary of Material Requisitions (Report of Material
Delivered)

25. Report of Material Delivered

Chapter XX. Time Reports and Pay-RoU Forms

FORM

26. Daily Time Report

27. Daily Time Report (Employees' Time Report)

28. Weekly Time Report

29. Daily Time Report

30. Daily Time Record (Employees' Time Report)

31. Daily Time Record

32. Daily Time Record (Employees' Time Report)

33. Daily Time Record (Employees' Time Report)
34a. Self-Figuring Time Card

34b. Self-Figuring Cost Card (face)

34r, Self-Figuring Cost Card (reverse)

35. Analysis of Pay-Roll

36. Analysis of Pay-Roll

37. Pay-Roll

38. Pay-Roll

39. Pay-Roll

40. Pay-Roll



XVI CONTENTS

Chapter XXI. Summaries of Production and Cost

FOBM

41. Analysis of Factory Expenditures

42. Statement of Factory Expenditures

43a. Statement of Factory Expenditures (left)
43b. Statement of Factory Expenditures (right)
44a. Statement of Factory Expenditures (upper part)
44b. Statement of Factory Expenditures (lower part)

45. Process Card Record (Process and Machine Cost Record)

46. Power Cost and Distribution (Process and Machine Cost

Record)

47. Production Report or Summary

48. Production Report or Summary

49. Production Report or Summary

50. Production Report or Summary

51. Defective Work Report

52. Schedule of Estimated Costs (Cost Sheet)

53. Cost Sheet

54. Cost Sheet (Summary of Production and Costs)
55a. Cost Sheet (left)

55&. Cost Sheet (right)



Chapter XXII. Forms Relating to Finished Product, Sales and
Financial Records

FOBM

56. Finished Stock Record (Record for Part-Finished and Finished

Stock)

57. Finished Stock Record (Record for Part-Finished and Finished

Stock)

58. Finished Stock Record (Record for Part-Finished and Finished

Stock)

59. Finished Stock Record (Record for Part-Finished and Finished

Stock)

60. Inventory Test

61. Inventory Sheet

62a. Shipping and Billing Record (original)
62b. Shipping and Billing Record (duplicate)
62c. Shipping and Billing Record (triplicate)
63a. Credit Certificate (original)
63b. Credit Certificate (duplicate)

64. Register of Sales and Costs

65. Register of Sales and Costs (Analysis of Cost of Sales)



CONTENTS

66. Salesmen's Costs

67. Operating or Factory Ledger

68a. Monthly Profit and Loss Statement (left)

6Sb. Monthly Profit and Loss Statement (right)

69a. Balance Sheet (left)

69b. Balance Sheet (right)

70a. Plant and Tool Record (face)

70b. Plant and Tool Record (reverse)



CHARTS



PAGE

1. Special Order System 198a

Productive Labor Method

2. Special Order System 214a

Process or Machine Method

3. Product System 226a

Productive Labor Method

4. Product System 236a

Process or Machine Method



COST ACCOUNTING

Theory and Practice



CHAPTER I

COST FINDING AND ITS FUNCTIONS

The importance of efficiency in business organization
has never been so generally recognized as at the present
time, and the subject presents an even greater field for
development in the future. One indication of this is the
increased volume of literature that is now available on the
subject. More than 90% of this literature has been pub-
lished in the last decade, and fully 75% in the last five
years.

The ultimate causes of this are to be found in the broad
field of economics. The gradual absorption and develop-
ment of natural resources, the exploitation of new fields of
commerce, the increase of population, the higher standards
of living and greater complexities of demands in modern
life — these are but a few of the innumerable influences
reflected in the industrial life of today.

Transformed to some extent, these changes meet the
manufacturer in the form of demands for more wages and
better labor conditions, in the increased cost of materials,
19



20 COST ACCOUNTING

and in a much keener competition in every phase of manu-
facturing and selHng his product. He must either adapt
his methods to meet the situation, or retire from the field.
Only one practicable road lies before him, and that is a
keener realization of the existing possibilities in his busi-
ness. To be specific, he must eliminate waste of every
kind, and plan his organization so as to increase the pro-
duction per unit of cost, which is another way of saying he
must introduce efficiency methods.

Various Phases of Efficiency Progress

This search for efficiency appears in many phases which
overlap each other, more or less. From the mechanical
standpoint, it involves a study of plant location and con-
struction, new and better types of machines, economies in
producing and using power, etc. From the labor standpoint,
it has given rise to new and improved methods of wage
payment, such as the differential rate plan and the premium
and bonus methods with their various modifications, all of
which offer increased pay for greater individual effort and
efficiency. Even the motions and positions of the workmen
are being analyzed into their component parts, with the
view of eliminating those unessential to the process in hand.
While some of these methods are still novelties, yet the time
is not far distant when most manufacturers will have to do
something of this kind for their own salvation.

From the standpoint of factory organization, more has
been attempted and accomplished, because the need has been
pressing and immediate. The purpose here is to bring the
activities of the whole plant, no matter how widespread,
under the direct review and control of the management. It
is felt, and rightly so, that a considerable loss is incurred
unless efficient systems and reliable statistics enable the
management to keep in touch with the various steps of



COST FINDING AND ITS FUNCTIONS 2 1

production, and to locate the responsibility for waste, lost
time, shop errors, etc.

Quite as essential in its bearing- on efficiency is the
process of cost finding; that is, finding just what it costs to
manufacture a certain order or article. Not only is this
necessary to determine possible selling prices, but it
provides the ultimate measure by which manufacturing
methods may be compared, and the best selected.

General Functions of Cost Accounting

Wliile the present book treats primarily of cost account-
ing, it would be a mistake if its scope were limited to finding
costs only. Any good cost system, properly operated,
performs two distinct, though related, functions.

The first, w^hich may be called the direct function, is that
of ascertaining actual costs.

The second, or indirect function, is that of supplying, in
its system of reports, the information necessary to organize
the many departments of a factory into working units, and
to direct their activities in accord with some definite plan.

Cost Accounting as Related to General Accounting

Cost accounting, as a science, is a branch of general
accounting. Its province is to analyze and record the cost
of the various items of material, labor and indirect expense
incurred in the operation of a factory, and to so compile
these elements as to show the total production cost of a
particular piece of work.

With the cost books once established, the best modem
usage is to incorporate their record in total in the general
financial books. In this way the modern cost system builds
up an interlocking series of accounts which furnish the
material for a detailed study of the operations of a manu-
facturing business.



22 COST ACCOUNTING

The accounts which appear in the cost books, however,
differ in nature and scope from those in the general financial
books. The latter exhibit the complete record of the finan-
cial and commercial transactions of the company, whereas
the former treat only of those transactions which deal with,
and are properly chargeable to, the manufacture of the prod-
uct. Like the general books, the cost records show the
amounts spent for material, supplies, labor and indirect
expenses; but in addition there appear accounts with the
various operating departments, classifications of the product,
part-finished stock, etc. It is these latter accounts that
make an analysis of costs possible.

Functions of a Cost System

The functions performed by a cost system with respect
to increasing the efticiency of a plant from an organization
standpoint may be noted under the following heads :

(i) The records provide for a perpetual inventory, and
also for the preparation of monthly statements showing the
industrial and financial condition of a company.

(2) The cost of each article or class of product being
separately shown, the management has invaluable data at
hand to guide it in making changes of policy or methods.

(3) Comparative costs for different periods and under
different conditions are obtainable.

(4) The records provide for following the material from
the raw state until it is finished product, and for ascertain-
ing the time, labor and expense involved in its manufac-
ture. In this way losses of material, wasted time, defective
work, poor foremanship, and various other '"leaks" are
detected.

(5) A cost system supplies the information necessary to
standardize the work of a plant.

The five items above mentioned are not to be regarded as



COSr FINDING AND ITS FUNCTIONS



23



a brief for the value of cost systems, but rather as an
analysis showing the lines along which a cost system
influences the factory organization.

Application of Cost Principles

The principles underlying cost finding have all been ana-
lyzed and defined ; but when it comes to the actual installa-
tion of cost accounts, the greatest skill and caution must be
observed in applying these principles to the conditions that
exist. No two manufacturing plants are alike, not even in
the same line of business. Every plant has peculiarities
that bear upon the methods of cost finding; and this makes
each factory a problem in itself. It follows that in either
writing or reading a treatise on the subject, this distinction
should be clearly conceived. The knowledge of principles,
without a corresponding familiarity with the facts and con-
ditions of manufacturing, produces the theoretical cost
finder, who is apt to be a nuisance. On the other hand, it is
only the shallow thinker who trusts to a superficial study of
forms and accounting practices, with the idea that such
knowledge prepares him to go into any business and install
a cost system. To attain success in cost work, one must see
and understand the application of the principles to the con-
ditions which actually exist.



CHAPTER II

ELEMENTS OF COSTS

Production costs are classified into three principal divi-
sions, known as the elements of costs :

(i) Material
(2) Labor
( 3 ) Expense

These may be subdivided into :

/ N T«T • 1 ( Direct

, . ^ , ( Direct or productive

(2) Labor < j ,■ ^ , ^.

'^ ■^ [ Indirect or non-productive

(3) Expense { fj^'ect

Direct Charges

"Direct Charges" is that element of cost that enters
into, and can be charged directly to, the product.

The cost of the substance out of which the product is
made is the direct material charge; the cost of the labor
applied directly to the productive process is the direct labor
charge ; and any other expense that can be charged directly
to an order, job or process may be included as a direct
24



ELEMENTS OF COSTS 25

charge under the caption "Direct Expense." The expense
of workmen in traveling to and from a job, as well as their
hotel expenses while engaged out of town on a particular
job, are examples of direct expenses.

Direct expense, while an important factor of cost in
some lines of business, rarely enters into the cost calculations
of ordinary manufacturing, and is disregarded in the pres-
ent volume.

Indirect Charges

Indirect material consists of such material as factory
supplies, which, while used in processes, either does not
enter into the product itself, or else enters in such a way as
not to be chargeable conveniently to any particular article.

Indirect or non-productive labor is that used in repair-
ing, handling, supervision, etc. — in short, any labor not
expended directly on the article or process itself.

Indirect expense as used here refers only to those ex-
penses incurred in the manufacturing end of the business
which are properly a part of the cost of production; e.g.,
supervision, repairs, light, power, depreciation, etc.

Indirect Expense

All expenses and charges other than direct charges come
under the general head of "Indirect Expense." This in-
cludes indirect material and indirect labor, as well as the
more closely delimited "indirect expense" of the preceding
section. Indirect expense is often known as "Burden" or
"Overhead."

Indirect expenses, as a class, fall into two divisions,
depending upon how they are to be apportioned or dis-
tributed in costs. The first division consists of those
expenses that can be apportioned to individual products or
certain processes, because they are incurred in particular



26



COST ACCOUNTING



departments of the factory, while the second is made up of
expenses which extend over the plant as a whole and must
be distributed over the products as a whole, and which are
therefore designated as general operating expenses.


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Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 1 of 19)