Jerome Lee Nicholson.

Cost accounting, theory and practice online

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to the conditions should be used. This report should show
the classification of the product, the nature of the work,
the time consumed, and, if practicable, the number of
articles produced. The rate and amount columns are filled
in and transferred to the "Analysis of Pay-Roll," the
classification being made by means of the classification

Analysis of Pay-Roll (Form 35)

The "Analysis of Pay-Roll" may be used as the regular
pay-roll if desired. The time or piece-work reports furnish
the information, which is entered for each day of the week,
and totaled for each pay-day. The distribution is made
over the various classifications by means of the classification

In making the distribution by classes of product, it
should be noted that certain forms of labor commonly


reckoned as indirect, can often be identified with certain
classes of the product. To ilkistrate, a foreman or inspector
may spend all his time in an operating department where
there are only one or two classes of product operated
on. While his work cannot be identified with any particular
articles, it belongs strictly to the class or classes as a whole ;
and it would be a mistake to put such labor with the other
indirect expenses and distribute it over all the departments.
Labor costs that can be so identified decrease the amount
of indirect expenses and increase the accuracy of the costs

When the pay-roll check is drawn, it should be charged
in total to the Pay-Roll account in the ledger. When the
amounts distributed on the analysis of pay-roll are charged
against the respective department accounts and indirect
labor, the Pay-Roll account in the ledger is credited.

Register of Sales

Where the sales are posted direct from the invoice, a
form or book should be used for analyzing them into classi-
fications of product.

Another method is illustrated by Form 64, where the
sales are entered on a register, and columns are added for
the classifications ; but in this case the sales classifications
only are provided for, the cost of sales being omitted.

At the end of the month, after all postings charging
customers' accounts have been made, the total of the sales
is charged to an Accounts Receivable account; and the
department columns are credited to the Department Sales
account in the ledger.

Department Accounts

When the system is first put in operation, department
accounts are opened in the ledger according to the classi-


fications of product. When the inventory is taken, it should
be classified by departments so far as goods in process and
finished stock are concerned, and should be debited to the
respective department accounts in the ledger.

The department accounts are also charged with all
material taken into process of manufacture, the information
being taken from the bill of material.

The labor cost chargeable to each department is taken
from the analysis of pay-roll. At the end of the inventory-
period the total charges of the indirect expense account are
distributed over the various departments on the basis of
direct labor charged to each. As stated in the beginning,
other methods of distribution can be used if provision is
made for gathering the proper data, as for instance,
the number of hours devoted by all the men to articles in
each class of product, which might be taken from the time
reports and be compiled on a special record. When the
distribution is made, the indirect expense accounts are
credited with the total amount.

At the end of the fiscal period the inventory is taken
in the same manner as the beginning inventory and credited
to the department accounts.

The balance of these accounts will represent the cost
of the goods that have been shipped; and this balance
should be transferred to the debit of the Department Sales
account, this account then showing the gross profit or loss.

The selling and administrative expenses are then pro-
rated and charged to the Department Sales accounts, the
balance of these accounts showing the actual net profit or

Work in Process Method

Another form of departmental system is based on the
keeping of a "Work in Process" account in the ledger.


Where this account is kept the inventory at the beginning
of the period is classified according to raw material, work
in process and finished stock, and these three accounts in
the ledger charged according to the inventory classification.
The charges to the "Work in Process" account are taken
from ( I ) the bill of material for raw material put in
process, (2) the analysis of pay-roll for labor, and (3)
the total of the indirect expense accounts.

At the end of each month the "Work in Process"
account is credited with the material, labor and indirect
expense, from the "Production Report of Finished Goods,"
which should be devised to show material, labor and indirect
costs. At the same time the Finished Stock account is
charged. The balance of the "Work in Process" account
will then show the value of the work in process.

As sales are made they are credited to the Finished
Stock account at cost, and charged to the department sales
accounts in the ledger, these accounts being credited with
the sales according to the proper classification. The
balances of these accounts show the gross profit or loss.

When the actual inventory is taken, it should agree
with the three classifications of inventory accounts in the
ledger, viz. :

Raw material

Work in process

Finished stock

If any discrepancies exist between the theoretical and
actual inventory, the difference will have to be distributed
on some basis, to the debit or the credit of the department
accounts, as the case may be.

Under this plan a monthly profit and loss statement may
be taken from the books, the accuracy of which will depend
on the accuracy of the factory reports.




In Chapter XII methods were presented by which the
manufacturers' estimates of the various elements of costs
were incorporated in the accounting system for the purpose
of showing or proving the accuracy or inaccuracy of these
estimates. This method, however, only tests the correctness
of the estimates under general divisions, there being no
individual proof on the article cost.

In Chapter XIII a step in advance was shown by the de-
partmental system, in that it ascertained the actual costs by
classes of product identified with selling classifications. In
this, however, as in the estimating system, no provision was
made for ascertaining the article cost.

This chapter presents a system by which the article cost
may be obtained with a fair degree of accuracy. At the
same time it meets the requirements of many manufacturers
who wish to dispense with much of the detail in cost keeping.
It is probably one of the simplest cost systems which can
be used, and under suitable conditions will be found fairly
satisfactory. It is not as complete as the systems which
follow in respect to ascertaining actual cost; and, while the
cost is found on the order or article so far as material and
direct labor is concerned, the distribution of the indirect is
made on a percentage based on the entire indirect expenses



of the plant, no provision being made for distribution on
the basis of departments.

Purchase Requisition (Form i)

In manufacturing- industries where there are maximum
and minimum hmits to the amount of stock to be carried
irrespective of customers' orders, the purchase requisition
may be used by the stock clerk in notifying the purchasing
department to order the required amount of goods, unless
the stock system is in charge of the purchasing department,
when no requisition is required. When the purchasing is
guided l^y the orders received from customers, the purchase
requisition may be made out by the clerk in charge of the
orders, or by the foreman of a department, or by the super-
intendent upon receipt of the production order. It may
cover only the material required on the particular production
order, or it may include estimates of material required for
a number of orders. Usually but one copy of the purchase
requisition is made, and this is sent to the purchasing de-
partment, where it is filed. Conditions, however, may be
such that it is advantageous to give duplicate copies to the
foreman or superintendent, and in certain cases to the stock
clerk as w'ell.

The requisition usually bears a number, and is designed
to show the date, the reason for ordering the article, the
quantity, description, and the date the goods are wanted.
It is signed by the person ordering the goods, and is ap-
proved by some one in authority. The date of the order
and the purchase order number are filled in by the purchasing

Purchase Order (Form 2)

The information appearing on the purchase order will
vary with the different conditions of selling. The form is


made out in duplicate, the original being sent to the person
from whom the goods are ordered, while the duplicate
remains in the office.

The particular feature of the form, as it relates to this
system, is the caption "Charge To." This will apply to
three different classifications :

(i) Charges to the cost of material purchased
for a factory order

(2) Charges to the cost of material purchased
for a customer's order

(3) Charges to the raw stock record

In case goods are to be charged under either of the
first two classifications, no material requisition is required.
In case they are ordered for stock, it should be so stated
under the caption "Charge To," and a material requisition
is necessary to take these goods out of stock and put them
in process.

When goods are charged to either a customer's order
or a factory order, the supposition is that they will be used
when received; and in such case it is unnecessary to make
any record on the raw material stock record. If, however,
they go into stock when received, they should be entered
on the raw stock record.

Report of Material Received (Form 3)

The original and duplicate copies of this form, after
being filled out as to quantity by the receiving clerk, should
be sent to the general office. The original goes to the
purchasing department and the duplicate to the clerk in
charge of the stock or cost records for comparison with the
invoice and for entry of the material on the raw stock
records or cost sheet, according to whether the material is



taken into stock or is immediately used for some particular
customer's order. After the invoice has been checked, it
is approved and entered upon the Purchase Journal.

Purchase Journal (Form 6)

The Purchase Journal is a columnar book which serves :

( 1 ) As an analysis for all invoices

(2) As a posting medium to the creditors'
accounts affected

The invoices are entered according to date. Each item
of the "Total Amount" column is posted to the credit of the
particular creditor's account, and the total of the column
is credited to the Accounts Payable account in the general
ledger, which represents a controlling account for all the
accounts in the creditors' ledger, show^ing in total what the
creditors' ledger shows in detail. The totals of the other
columns, with the exception of the last two, are posted to
the debit of their respective accounts. The amounts in the
last column are posted in detail to the debit of the specific
accounts mentioned under the caption "Sundry Accounts."
All the amounts entered in the "Raw Material" column
should have been charged in the raw material stock record
or the cost sheet, under the caption "Material," from the
report of material received.

Stock Record — Raw Material (Form 10)

The entry in the raw material stock record under the
caption "Ordered" should be made when the stock clerk
makes out the purchase requisition. The information under
the caption "Received" should be taken from the material
received sheets, and the information under the caption
"Delivered" from the report of material delivered. The


costing of the material is made from the report of material

Production Order and Cost Sheet (Form 15 a)

This form provides for charging all costs to a particular
order number, shows the date wanted and to be completed,
and is made out in duplicate. The original, which is purely
the production order, is sent to the factory, while the
duplicate remains in the office, where the charges for
material, labor and overhead are entered upon it. The
features of gathering the elements of the cost upon the
duplicate copy are explained under the later discussions of
cost sheet calculations.*

Material Requisition (Form 19)

This form is made out by the foreman of the operating
department when he requires material called for by a pro-
duction order. The particular style of the form will depend
on the class of material used. Where one material requisi-
tion embraces all the material on an order, it will not be
necessary to use a summary of material delivered ; but where
the material is taken out on two or more requisitions, the
summary of material delivered should be used, and the
"Cost" column of the material requisition need not be filled
out, the costing in this case being done on the summary of
material delivered.

Report of Material Delivered (Form 25)

The "Report of Material Delivered" summarizes the
material cost by classification of material and by order
number. This is done for the purpose of crediting the raw
stock records and charging the cost sheet with the material
as it is used on orders.

•"Production Order and Cost Sheet (b)," page 192.



Employees' Time Report (Form 30)

The main point to bear in mind when designing a time
report is to harmonize it with the principles of cost-finding,
as applied in the particular system. The form presented
herewith is intended to be used with a time stamp, but it
is not intended to imply that a form of this character must
necessarily be used with the system of cost-finding under
consideration. In using the form illustrated, the time should
be stamped on the card, the order number entered, and the
operation upon wliich the workman is engaged checked,
all operations being printed on the form.

The cost of all the productive labor as shown by the
employees' time reports should be entered on the production
order and cost sheets of each order, and also on the pay-roll.

Labor of any other kind, which cannot be charged to a
production order, forms part of the indirect expenses and
should be entered on the pay-roll form under the caption
"Indirect." Should the labor be in the nature of an asset,
such as labor on the construction of a machine to be used
for manufacturing purposes in the plant, the time should be
charged to a special production order.

Pay-Roll (Form 39)

When a pay-roll of the design shown is used, the time
records should be summarized and entered on the pay-roll
at the end of each week, the entries showing the amount
due to the workmen, and the distribution into direct and
indirect. "Supervision" is made a separate classification
here, although it is also "indirect." The charges in the
column headed "Supervision" are usually for services of the
foreman in the operating department, but may also include
any other labor charge of this character.

When wages are paid, the amount of pay-roll is entered



in the cash book, according to the classification shown in
the pay-roll, these classifications being debited in the ledger.

Production Order and Cost Sheet (Form 15 b)

The arrangement of that portion of the production order
used for collecting the cost data will depend entirely on the
class of business in which the special order system is used.
The design shown here is made in duplicate, the original
or short copy going to the factory, and the duplicate
remaining in the office.

The information under the caption "Material" will come
from the report of material received, the material requisition,
or the report of material delivered. This will give the
material cost of the order. The labor cost is obtained from
the time reports, and may be posted directly from these
records, according to operation, or may be summarized on
a pay-roll analysis and posted in total.

The "Indirect" will be ascertained by adding to the labor
cost a fixed percentage to cover indirect expenses. The
percentage used in this system is predetermined, based
upon the results of past periods, and may be changed at
inventory periods, or as conditions warrant.

Stock Record — Finished Product (Form 56)

When all orders are shipped immediately upon com-
pletion, it is unnecessary to keep a finished stock record;
but where a stock of the finished product is carried on hand
the entries under "Production" should be made from the
production order and cost sheet, and under "Sold" from the
sales record.

It frequently occurs in a special order business that parts
which are common to certain styles of product are manu-
factured and kept in stock, so as to facilitate shipments
when orders are received. In all such cases the regiilar



production order and cost sheet should be used, and the
regular course pursued.

Bill and Shipping Order (Form 62)

The billing system provides for three copies of the bill
and shipping order, which are used as follows :


Duplicate — Serves as a shipping order.

Triplicate — Serves as a sales record, being used
for posting to the customer's account. It also pro-
vides columns for calculating the cost of the sale.

Credit Certificate (Form 63)

This form is used for returns of goods sold, the selling
price being taken from the sales record or the sales sheet,
and the cost price from the "Production Order and Cost
Sheet." The original is sent to the customer, and the
duplicate remains in the office to act as a posting medium to
the accounts. A material received sheet should be made
out in all cases where merchandise is returned, showing the
actual receipt of all such goods and thereby serving as a
voucher for the credit certificate. The merchandise re-
turned should be entered on the finished stock records. In
case returned goods are defective, they may be entered on
the part-finished stock record until the defects are corrected
or until the goods are disposed of as seconds or scrap. The
loss in value or the cost of repairs will be charged against
the department or account affected.

Register of Sales and Costs (Form 64)

This form provides for registering the sales and dis-
sales price and cost according to sales



classifications. Goods returned as shown by the credit
certificates should also be entered on a separate sheet of the
register of sales and costs and, at the end of the month,
deducted from the totals according to their respective classi-

The total of the "Accounts Receivable" column should
be charged to that account in the general ledger, and the
total of the sales columns "A," "B," and "C" should be
credited to these accounts in the ledger.

The total of the "Cost of Sales" column should be
credited to the finished stock account, and the totals of the
cost of sales columns "A," "B," and "C should be charged
to the sales accounts in the ledger.

Inventory Test (Form 60)

The purpose of the "Inventory Test" is explained in
Chapter VII, but a brief reference to it is necessary here, as
no system should be operated w^ithout a form of this
character. Should the inventory test reveal missing stock
which cannot be accounted for, an entry should be made
crediting the stock records, and charging an account —
which might be called "Over, Short, and Damaged Ac-
count" — in the ledger. Should the stock records show less
stock on hand than is actually found, then the entry would
be a debit to the stock records, and a credit to the Over,
Short, and Damaged account. The balance of this account
forms part of the general operating expenses.

Explanation of Chart and Summary of Entries

Subsidiary Forms and Records

The books and forms used to authorize and record the
purchase of materials and supplies, and other expenditures
as these are made, are four in number :


(i) The "Purchase Requisition," which shows
the materials and supphes required, and is followed by

(2) The "Purchase Order," which is sent to the
creditor, ordering the necessary materials or supplies.

(3) The "Invoice," which is checked when
received with the purchase order, and also with the
report of material received, and is then entered

(4) The "Purchase Journal," which classifies the
expenditures, for posting to the controlling accounts

The forms required in recording, receiving, storing and
requisitioning raw material are as follows :

(i) "Report of Material Received," which —
after being verified with the purchase order — is
entered on

(2) The "Raw Stock Record" — unless the
material is entered directly upon the cost sheet of a
particular order.

(3) The "Material Requisition," which shows
the raw materials required for a certain order, and

may be entered directly upon the cost sheet of a
particular order, when same is credited to the raw
stock record, or may be recapitulated upon the
report of material delivered.

The report of material delivered shows the raw material
put into operation, which is credited on the raw stock
records, and charged to the cost sheets of the various orders

The forms necessary for the compilation of the cost data
are as follows :



( 1 ) The "Cost Sheet," which is charged with the
material put into operation from the "Report of
Material Delivered," as above described, with the
labor cost from

(2) The "Time Reports," and with the indirect
expenses which are obtained from a previously

(3) "Schedule Showing the Fixed Percentage"
to be added to the labor cost.

The time reports are summarized upon the pay-roll for
pay-roll purposes.

When orders are completed they are either transferred
to the "Finished Stock Record," or shipped and billed
directly. In case the finished orders are put into stock, entry
is made upon the finished stock record. When the orders
are shipped and the bill is prepared, entry is made in the
"Register of Sales and Costs." In case the credit certificate
shows merchandise returned, entry should be made upon
the finished stock record, and also upon the register of sales
and costs.

Method of Control

The controlling accounts in this system are all kept in
the general ledger, and are as follows :

( 1 ) Raw Material

(2) Direct Labor

(3) Accounts with the items composing the
indirect expenses

(4) Overhead

(5) Work in Process

(6) Finished Stock

(7) Accounts with the various sales classifications



(i) The Raw Material account represents in total
what is shown by the raw stock records in detail. It is
debited with the total purchases of raw material, as shown
by the purchase journal, and is credited with any allowances,
and with the total raw material which has been requisitioned
out. as shown by the report of material delivered, the
balance representing the inventory of raw material and
agreeing with the detailed raw stock records.

(2) The Direct Labor account is debited from the cash
book with the total amount paid for productive labor, and
is credited from the summary of the time reports with the
total amount distributed and charged to the "Production
Order and Cost Sheets."

(3) The accounts representing the items composing the
indirect are debited, either from the purchase journal or
cash book, with the amount incurred for each classification,
and are credited each month with the balance of the account,
unless part of same is to be treated as a deferred charge.

(4) The Overhead account is charged each month,
through a journal entry, with the items composing the in-
direct expenses, and is credited from the schedule showing
the fixed overhead percentage with the total amount applied
to the various production orders and cost sheets. The
balance, if a debit, shows the undistributed portion of the
overhead, which means that the fixed percentage added to
the labor cost was not sufficient to cover the indirect ex-

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Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 12 of 19)