Jerome Lee Nicholson.

Cost accounting, theory and practice online

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9. Are there any machines or mechanical appHances?
If so, list them and describe uses.

10. Is any final inspection or test made here?

11. How is the product disposed of after its comple-
tion ?

12. Obtain copies of all forms and books used.

13. Remarks.

(13) Packing Department

1. What sort of package and packing materials are

2. Are packages made or bought?

3. How are packing materials, nails, twine, wire, etc.,
taken out of stores; i. c, by requisition or otherwise?

4. How are values of above ascertained, and how
applied to shipments?

5. Number of employees and their duties.

6. How is time recorded and applied?

7. How are deliveries made to shipping department
and how accounted for?

8. Obtain copies of all forms used.

9. Remarks.

(14) Shipping Department

1. How are shipments checked out?

2. What records are kept and what reports are made
to general office?

3. Are shipments made from own siding or trucked to
railroad stations?

4. How are partial shipments handled?

5. Any mechanical aids?

6. How many employees and their duties?

7. Obtain copies of all forms and books.

8. Remarks.



(15) Sales Division

1. Explain manner of selling product.

2. Amount of sales annually?

3. Are sales evenly distributed over the year, or are
they made in seasons? Explain.

4. Are sales classified, and, if so, how?

5. Are any branch warehouses, offices or agencies
maintained? If so, describe, and how handled.

6. Any mail order business? Explain plan, if any.

7. Any retail department ? Describe how handled.

8. How many salesmen employed — on salary or com-

9. Any records of salesmen by territory?

10. Any records of profits on sales of each man as

11. Are statistics as to sales and salesmen compiled
regularly or only at intervals?

12. Any advertising plan? Describe it and the records

13. Describe follow-up system, if any.

14. Describe filing system.

15. Describe freight rate records, if any.

16. Give office force and duties of each.

17. Obtain copies of all forms or books, including
route lists, salesmen's reports, expense accounts, quotation
records, etc.

18. Remarks.

(16) General

1. Capital stock? Is it common, preferred, or both?

2. Any unissued or treasury stock?

3. Any bonded, mortgage or other funded debt?
State class.



4. Give names of ofticers or members of firm and their

5. What records are kept by each, aside from those
mentioned below?

6. Give heads of departments in general office and
their duties.

7. What records, if any, are kept by each?

8. Any friction between officers or heads of divisions?

9. Any lack of organization or facilities in general

10. Mail and correspondence — how handled?

11. Stamps — how handled and controlled?

12. Filing and card index system, and how handled?

13. Divisions, number of employees in each and their

14. Forms and books used in each division, with ex-
planation as to how used.

15. Methods of accounting, including basis of closing,
and ascertaining of profit and loss.

16. Classification of accounts, with explanations.

17. Billing system — explain fully.

18. Collection methods and records.

19. Stationery records as to costs and manner of issue.

20. Are any plant, pattern, tool or employees' records
maintained? If so, explain.

21. Pay-roll, how made up? Are receipts taken from
employees? Explain with reference to both office and

22. Do manufacturing accounts interlock with general

23. Is clerical work up to standard and kept up to date ?

24. Is there any cost system in operation? If so,
obtain full particulars, especially with reference to methods


of distributing shop-burden and general overhead, and
method or -routine of collecting and tabulating figures to
obtain costs.

25. What objections are offered, if any, against the
introduction of improved accounting and efficiency

26. Remarks.

The method employed to record the information ob-
tained from the physical examination of a plant depends
entirely upon the individual conducting the examination;
but a convenient plan is for the examiner to spend the
forenoon of the day in the examination of one or more
departments, making notes of the information received,
and in the afternoon to write up in detail the result of the
examination. Thus it is possible to review the morning's
work while the details are still fresh in mind, and to add
any information that may have been overlooked in the
first place.




Co-operation of Management and Employees

After the plant has been thoroughly examined, and all
the information has been classified according to the different
phases of cost-finding, the next problem is to devise a system
that will perform its twofold function and at the same
time be practical in its workings. There are often many
conditions outside of the manufacturing part of the plant
that have an important bearing on the situation. Not least
among these is the disposition of the manufacturer himself
and his assistants. It is next to useless to try to install a
system that is going to be regarded with suspicion and
criticism before it has had a chance to prove its worth. To
get the best results the co-operation of the whole force is

The foremen and department heads are often the most
persistent objectors, as they are likely to regard the installa-
tion of a cost system as an invasion of their territory. They
are right to the extent that the system provides an effective
means of examining their work and measuring their effi-
ciency, in a way that cannot be done by personal inspection.
The usual shortcomings of a foreman are to be found in his
failure to plan ahead properly and lay out work for the men
under him, and the time reports will show his deficiencies
in this respect. To illustrate, the time-clock cards may show
that the men were present 900 hours during a week, while


the time reports, which indicate the time spent on jobs, rtiay
show only 800 hours for the same week. Under a cost
system this cross-checking of time records should never be
omitted; and if a difference exists, the foreman should be
called upon to explain the discrepancy.

Fitting the System to Existing Conditions

Much depends on whether the employer is willing to
engage a special cost clerk or not. If the work is to be
undertaken by the regular office force, the system must be
one they can handle ; and this involves a very simple system
when the office clerks are not particularly capable. More
will be accomplished by generalizing results in such cases
than by putting in a complete system, which is bound to
break down because the clerical force cannot handle it.

In other words, the cost accountant must work along
the lines of least resistance, and begin v^-ith as simple a
system as possible, amplifying this and adding new features
as the conditions allow. This is the reason for introducing
at first an "Estimating" system, which will serve its own
purpose and also soon, show where more complete methods
should be applied. The size of the plant and complexity of
the work will of course have some influence on the system,
both in the beginning and during its growth. It cannot be
hoped that an elementary installation will give satisfactory
results where there are many varieties of articles manu-
factured, or where the processes are numerous or involved.

The growth of a system is not necessarily toward com-
plexity. Very often, after a factory is well organized and
the efficiency work of the cost system beginning to show
results, features that were at first treated separately may
be included in larger units, and much detail labor avoided.
The system at first must fit existing conditions ; but one of
the objects in view is to change conditions for the better,


and when this is done the system itself may be changed
accordingly. There are conditions, too, that remain com-
paratively constant from year to year; and when a cost
(System has obtained the results by detailed methods for one
or two years, that part of the system may be dropped and
the results considered as a constant quantity. There is
little benefit in verifying established data, especially if the
verification is involved or expensive and can be accomplished
approximately by other means.

Red Tape

Whatever kind of system is devised, every precaution
should be taken to avoid making it top-heavy. If there is
one thing more than another that excites criticism, it is
"red tape" that does not justify itself in practical results.
It may show itself in a mass of undigested reports, trouble-
some to make up in the shop and impracticable to use in
the office, or it may take the form of volumes of data that
no one ever looks at. Another form of red tape, not un-
common, is carrying small items of cost to such a degree
that the process of determining them is more expensive than
the costs themselves.

In avoiding these pitfalls, the cost expert will sometimes
appear to be violating the fundamental principles of cost-
finding, when, as a matter of fact, he is only preventing them
from going to seed. The last point will bear illustration.
In manufacturing straw hats the material costs appear under
five heads : the braid or straw, the band, the sweat — which
is the leather inside — the trimmings, and the thread. Under
a special order system the only practical way to treat the
thread is to put it in the general indirect expenses and dis-
tribute it over the hats without regard to their grade or
value. The expense of finding the cost of the thread enter-
ing into any particular grade of hats would be greater than


the cost of the thread itself. Similar instances can be cited
in many industries.

Reports for Executives

The systematizer must keep in mind what the practical
objects and purposes of the cost system really are. The
system itself is not the result; it is only the means by which
results are obtained.

If the cost system is to be the measure of shop efficiency,
thought will have to be given to the form in which the re-
sults should appear. The record to be used to show these
final results is the comparative analytical statement prepared
at the end of every cost period, in which the expenses are
classified. The comparison may be made by parallel columns
or by comparing different sheets. Sometimes the various
expenses are plotted on charts so as to show at a glance the
upward or downward tendency. The completeness of the
classification depends upon the completeness of the system,
and, as stated before, this depends on a number of con-
siderations. The idea is that the manager should be able
to put his finger on any variations in any item of expense
relating to any class of goods or to any department, and
either know the cause or be able to investigate and dis-
cover it. Not only can variations be studied, but each item
may be considered by itself with the idea of applying a
remedy if needed. In short, an adequate report of cost re-
sults serves as the key to the whole situation, giving the
management positive knowledge of the facts as they are.

Cost Period

One feature that must be decided before actual arrange-
ments are made for installing a system is the cost period.
This is the unit of time for which costs are to be summarized
and reported, and usually covers a month. It is advisable



to have the cost period coincide with the pay-roll periods as
far as practicable, so that the closing days will agree; that
is. if the men are paid by the week, the cost period may be
four or five weeks. In this way calculation of wages due
but not yet paid will be avoided, and the distribution of
costs simplified.

General Outline of Systems

The systems described in the following chapters have
been selected with the idea of illustrating the principles of
cost accounting applied to the general types of systems out-
lined in Chapter IV. As far as possible, the systems have
been made general rather than specific, in order to provide
for flexibility in adapting them to actual conditions. In any
particular case the system adopted will probably require
some modification, which, while not affecting its general
plan, will apply its principles in a different way. The aim
in each instance must be to make the system practical in
its operation. Much of the opposition and criticism that cost
systems have incurred is due to too much enthusiasm and too
little common sense in their planning. The system has been
placed ahead of the business.

There is nothing presented in these chapters, in the way
of either methods or designs, that has not met with success
in actual operation. They do not merely represent what
might be accomplished, but what really has been done.

Estimating Cost Systems

In Chapter XII is presented a graded series of "Primary"
or "Estimating" cost systems, which will locate the causes
of faulty or erroneous estimates. Besides having obvious
values of its own, an estimating system will indicate along
what lines a more det^iiled cost system should be applied, if
that is desirable. As an efficiency agent, however, the


estimating system is of little use, since it does not provide
for reporting the work of the shop in detail.

Departmental System

In Chapter XIII methods of finding the cost of different
classes of product by the class are described under the title
"Departmental System," the word "Departmental" referring
to the classification of product, and not to the operating de-
partment. It is an intermediate step between the primary
or estimating and the complete cost system. The costs of
a particular class are found, but are not analyzed beyond
the principal divisions. Under such a system the danger
is that some articles of a class may be manufactured at a
loss, and the loss be concealed by the profit on other articles
of the same class, while the class as a whole shows a profit.
\\']ien the classification is simple in character, however, a
departmental system may often be used to great advantage,
since much of the detail work of a complete system is

Special Order and Product Systems

The four systems described in Chapters XIV to XVII
inclusive illustrate in each case one of the four general types
referred to in Chapter IV. The descriptions themselves
are given from an accounting standpoint, since the system
of accounts is the key to the system of operations. The con-
ditions to which each system applies are outlined at the
beginning of the chapter in which the particular system is

To avoid confusion, only two methods of distributing
the indirect expenses have been used, the direct labor cost
and new machine rate. Each method is given in connection
with both a "Special Order System" and a "Product
System." If the principles are well understood, there should


be little difficulty in changing the forms and classification
of accounts, so as to provide for any other method of ex-
pense distribution.

Attention should be called to the necessity which often
exists of combining different methods in the same plant.
For instance, in either a stove works or a tannery the first
few operations are best covered by a product system, while
at a certain stage the manufacture breaks off abruptly into
what is essentially a special order business. There are also
many instances where part of a plant must employ a pro-
ductive labor method, while the rest can only be treated
rationally by machine rates. Such cases, especially the
former, call for considerable ingenuity in welding the two
systems of cost accounts into one without loading it with
extra details.

In presenting the four cost systems, no attempt has been
made to include all the organization forms, some of which
are essential for a cost-finding system conducted on a
systematic basis. The systems as presented are intended to
illustrate, as far as possible and without too great detail,
the best methods for compiling the cost data intelligently
and accurately and interlocking the cost accounts with the
general books.

In explaining and describing the forms for gathering
and compiling the cost data in the different systems, some
repetition has been unavoidable in explaining the applica-
tion of the same principles or forms under different con-
ditions. Where such repetition occurs, it is only for the
purpose of making the matter clear without too frequent
reference to other parts of the book.

Charts of Cost Systems

The charts of the four cost systems, which appear in
connection with the descriptions of these systems, are de-


signed to show in concise form the course of the entries on
all records and accounts affected. These charts, in connec-
tion with the explanations of the forms and records, give a
clearer and more comprehensive understanding of the
detailed workings of the system than could be obtained

The charts are each divided into three main divisions,
showing :

(i) A general description and classification of
the entries which affect both the subsidiary and the
controlling records

(2) The course of the entries on the subsidiary
forms and records

(3) The method of control, and the entries affect-
ing the controlling records

General Description of Entries

The entries of a cost system may be classified under six
divisions :

(i) Authorizing the purchase of materials and
supplies, and the incurring of other expenditures

(2) Receiving, storing and requisitioning of
raw material and supplies

(3) Putting raw material into operation

(4) The compilation of cost data on the cost

(5) The transfer of finished parts or finished
stock to their respective stock records, and also the
transfer of part-finished stock back into operation to
be completed

(6) The shipment and sale of finished stock or
part-finished stock, and also the return of finished



stock or part-finished stock, including the entries
upon the register of sales and costs

By means of these six classifications, one can very readily

(i) The detail records affected

(2) The controlling accounts affected

Subsidiary Records

The subsidiary records on the charts are represented by
rectangles upon which are entered the names of these
records and also their numbers.

The course of the entries upon the subsidiary records is
denoted by means of arrows which show :

(i) The source from which the information is
obtained ; and

(2) The disposition of the information

Method of Control

The division of the charts on which appears the method
of control of the subsidiary records is classified so as to show
the posting medium, the factory ledger accounts affected —
if a factory ledger is used — and the general ledger accounts

Under the caption "Posting Medium," those records are
mentioned from which postings to the factory ledger and
general accounts may be made. It should be borne in mind,
however, that the entries affecting the factory ledger may
be entered in a cost journal, and postings may then be made
from that source.

Under the captions showing the accounts affected the
entries are in journal entry form.


Forms and Designs

When it comes to the question of choosing or designing
the forms to be used in any particular case, it is impossible
to exercise too great care and foresight. The matter is one
that cuts deeper than is apparent at the first glance. Funda-
mentally, a form is determined by the question, "What do I
want to know?" Not only the form but the system to be
adopted depends on the answer to this question. The next
question is, "How can the facts best be obtained, summarized
and arranged, so as to get the most out of them with the
least trouble and expense?"

This cannot be answered until the type of system to be
installed has been decided upon. The whole system should
be arranged so that its several parts will fit in the scheme
naturally and conveniently.

Forms have not been provided in all cases for sum-
marizing purposes. In many cases this may be done on the
form upon which the original data is compiled, and where
this is not practicable, blank paper with ruled columns will
answer the purpose.

The forms for gathering the data at first hand should
be designed with the idea of getting the necessary informa-
tion with the least disturbance to the workmen and to shop
routine consistent with accuracy.

Forms, as a whole, may be arranged so that they may
be used for more than one purpose. For instance, the
material requisition sheet is customarily made out to show
the amount and cost of material entering into any given
production order, but the information recorded there may
be just the information needed in connection with keeping
a stock record. This double purpose of the form is accom-
plished either by making the form more general or inclusive
in design, or by making extra copies. In actual practice the


scope of forms is limited by their respective uses. That is,
the same data should not be collected over and over again.
The forms as described in this book overlap because it is
necessary to show what uses can be made of each form —
not what uses should be made.

The forms submitted are limited in number ; and with
this in mind, they have been carefully selected rather as
suggestions to work from, than as examples from which to

A careful inspection and comparison of related forms will
often suggest the minor changes necessary to adapt them
to other kinds of systems. Adding a new column or chang-
ing the classifications will often enlarge the scope of a form
more than would seem possible.

No attempt has been made to explain completely all the
functions that each design could perform, the object being
to cover only the main functions it performs in the system
under consideration. Wherever more information is de-
sired as to the general use and purpose of any particular
form than is given in the system described, reference should
be made to the chapters relating to the recording and com-
piling of the cost data.*

The forms presented in Chapters XVIII to XXII, in-
clusive, are also supplied under separate binding, so that the
reader may have them conveniently before him when they
are to be consulted in connection with the text.

•Chapters VII, VIII.



Purpose and Kinds

The estimating cost system is used for verifying esti-
mates of the cost of production and for locating mistakes in
the estimates. How well its purpose is realized depends
on the degree of refinement with which the estimates are
made and on the records kept to verify them. Three plans
or grades of estimating systems are presented here, ranging
in scope as follows :

( 1 ) Verification of estimates on the total amounts
of the material, labor, and indirect expense

(2) Verification of estimates on material and
labor classified by departments or operations, together
with the total indirect expenses not classified

(3) Verification of estimates on each class of
product according to departmental material, labor and


The good features of estimating cost systems are three
in number. First, the clerical work is comparatively small
compared with that involved in a complete system ; second,
the estimating system often discloses weak spots in the
estimates, and indicates where complete methods should be
introduced ; and third, it may be used with good success in



small factories, or in larger plants where the product does
not represent a wide variety of articles.

First Plan of Estimating Costs

In the simplest and most elementary estimating cost
system, there are but three forms used :

( 1 ) Schedule of Estimated Costs

(2) Inventory Sheet

(3) Analysis of Cost of Sales

Schedule of Estimated Costs (Form 52)

This form is specific in character, and provides for the
total estimated cost of each kind of article manufactured,
divided into the three elements, material, labor and
indirect expense. The estimates that appear in this schedule
are to be used in pricing the inventory and cost of sales.

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Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 10 of 19)