Jerome Lee Nicholson.

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penses. When there is a credit balance, however, it shows
that the percentage allowed was more than sufficient. In
either event, the percentage to be used for the next period
should be adjusted in accordance with the information thus
disclosed.

(5) The Work in Process account is debited with the
total amounts that have been credited to the raw material,
direct labor and overhead accounts, and is credited from the



198 COST ACCOUNTING

summary of finished orders with the total cost of the orders
that have been completed, when these are either transferred
to finished stock or shipped. The balance represents the
total amount of work in process, and should agree with the
total production orders and cost sheets not completed.

(6) Finished Stock account is debited from the summary
of finished orders with the total cost of completed orders,
and is credited from the register of sales and costs with
the total cost of the sales, the balance being the inventory of
finished stock. It represents in total what is shown in detail
by the finished stock records.

(7) Sales accounts should be kept with each classifica-
tion of the product, and should be debited with the total
cost of the sales when same is credited to the Finished Stock
account. The accounts are credited with the total selling
price of the sales when same is debited to the Accounts
Receivable account. The balance, if a debit, represents the
gross loss, and, if a credit, the gross profit.

Profit and Loss Statement (Form 68)

The "Profit and Loss Statement" is prepared from the
ledger accounts. The departments represent the classifica-
tions of the product according to selling departments. The
information for the first three columns is obtained from the
sales account of each selling department. The selling and
administrative expenses may be distributed over the various
departments on some arbitrary basis, according to the
amount of sales, cost of sales, or gross profit that each de-
partment bears to the total of all departments. If, however,
some of the items composing the selling and administrative
expenses can be localized and charged to a specific depart-
ment, this should be done. In such case the results will be
more accurate, because the total to be distributed arbitrarily
has been lessened.



A



-ECTING GENERAL
GENERAL



faw


Material Account




eel Enpanse Accou


C-


Accounts PayabI






dir


eel Lahor Accoun


Cr


Cash Account



Raw Malenal/g^i, |„ process Account

Cr. Raw Material Account



/Ofk In Pro
Cr. Direct
Cr. Ovejhe



lishea Stock Account

'•r. Work in Process Accoun



Shipment or _ „ , .

ct„.i, .nfl P„i Cr. Finished Stock Ac^count
"°!r»r.'; Cr. work in Proces. Accoun



red from accoun



SPECIAL ORDER SYSTEM



199



Balance Sheet (Form 69)

The balance sheet is also prepared from the accounts in
the general ledger. In addition to showing the hnancial
condition at the end of the month, it shows the increases or
decreases of each item as compared with the previous period.



I



SPECIAL ORDER SYSTEM



199



Balance Sheet (Form 69)

The balance sheet is also prepared from the accounts in
the general ledger. In addition to showing the financial
condition at the end of the month, it shows the increases or
decreases of each item as compared with the previous period.



CHAPTER XV

SPECIAL ORDER SYSTEM BASED ON THE
PROCESS OR MACHINE METHOD

The system outlined in this chapter provides for finding
costs under the machine or process method, and differs from
the system described in the preceding chapter more par-
ticularly in the method used for the distribution of indirect
or overhead charges by operating departments or manu-
facturing centers. It is applicable where the production
order represents the customer's order, although it may be
used to advantage where the production order represents
a definite production by classification of product from which
customers' orders are filled. As the conditions in every
plant — even those in the same line of business — are different
in some respects, the forms submitted here are only for
illustrative purposes, and to suggest the general nature of
the designs to be used. It will be noted that certain forms
are used of exactly the same kind as in the previous system.

Purchase Requisition (Form i)

The explanation in Chapter XIV covers the salient points
in connection with this form. As the present system is
adapted to plants of larger size than the system described in
Chapter XIV, the purchase requisition would usually be
made out by the stock clerk, all material purchases going
into the storeroom.



SPECIAL ORDER SYSTEM— PROCESS METHOD 201

Purchase Order (Form 2)

In illustrating this design, which is the same as the
purchase order of Chapter XIV, particular attention is called
to the caption "Charge To," under which the entries should
indicate whether the charge is to be made against the
production order or the storeroom.

Report of Material Received (Form 3)

The explanation of this form will be found in Chapter
XIV.*

Accounts Payable Voucher (Form 7)

The accounts payable voucher provides for recording
and analyzing the expenditures, and arranging them in
such a manner as to facilitate entry on the register of ac-
counts payable. The expenditures are classified into two
main divisions :

( 1 ) Those affecting factory records

(2) Those affecting general ledger accounts

The entries affecting factory records consist of material,
labor and indirect expenses ; while the general ledger entries
consist of administrative expenses, selling expenses, and all
charges to capital accounts, such as real estate, plant,
equipment, etc.

When the accounts payable voucher calls for materials
or supplies purchased, the purchase requisition, purchase
order and material received sheet should be attached ; and
if it shows the expenditure for labor as well, the pay-roll
analysis should also be attached.



•See page ij



202 COST ACCOUNTING

Register of Accounts Payable (Form g)

The accounts payable vouchers are entered in the register
of accounts payable according to date and voucher number.
In addition to showing name of creditor and amount payable,
the form provides space for entering payment of the voucher
and for indicating the charges to the operating and property
accounts.

The entries for the accounts in the general ledger are as
follows :

The total of the "xA.ccounts Payable" column is credited
to the Accounts Payable account. The totals of the
"Factory," "Selling Expenses," "Administrative Expenses,"
"Machinery and Tools," "Real Estate and Buildings," and
"Furniture and Fixtures" columns are debited to their re-
spective accounts. The details in the "Miscellaneous
Accounts" column are posted individually to the debit of the
proper accounts.

Stock Record — Raw Material (Form lo)

In this system, all raw material stock is supposed to be
ordered by the stock clerk, who fills in the quantity under
the proper caption at the time he makes out the purchase
requisition. The information as to the quantities received
and delivered is obtained from the report of material re-
ceived and report of material delivered, the costing being
obtained from the latter.

Production Order and Cost Sheet (Form i6)

It will be noted that in both the special order systems,
the production order and cost compilation are combined.
The two purposes — that is. the authorization for the manu-
facture of goods and the compilation of the costs — may as
well be separated, and this has been done in the product



SPECIAL ORDER SYSTEM— PROCESS METHOD



>03



systems described elsewhere.* In the present system the
first copy of Form 16 is used as a production order only,
while the duplicate is used as a cost sheet. The purpose of
using different designs in the different systems, as already
explained, is to illustrate the different methods of gathering
the cost data.

If sub-production orders are issued to the various de-
partments, it will be necessary to use the original only, not
the duplicate. The use of the duplicate copy is explained
in its proper order in this system. f

Material Requisition (Form 19)

The general explanation of this form is given in
Chapter XIV, but where the requisition is to be used for the
supplies chargeable to a machine or process, the machine or
process, according to the department, should be indicated
under the caption "Charged" in place of "Order Number."

Report of Material Delivered (Form 25)

The "Report of Material Delivered" is used in this
system to summarize the material requisitions according to
department and order number. In case of supplies charge-
able to a machine or process, the order number should be
omitted, and the machine or process inserted. The costs of
material delivered are entered on this form, and not on the
requisition. The raw stock records are also credited from
the "Report of Material Delivered." If the material is to
be used for maintenance, an entry is made on the process
card record, and if for repairs and supplies, on the "Power
Cost and Distribution Record." The material cost is
entered on the duplicate copy of the "Production Order and
Cost Record," according to order number.

♦Chapters XVI, XVII.
tPage 2o8.



204



COST ACCOUNTING



Employees' Time Report (Form 30)

The time reports should be summarized for entry on
the pay-roll in the same manner as in the previous system.
All the direct labor is also entered upon the process card
record, classified according to department, machine number,
and operation. The direct labor time, classified by opera-
tions, is also entered upon the "Production Order and Cost
Sheet" of the respective orders. It will be seen, therefore,
that the direct labor time as entered upon the process card
records should agree with the productive labor time entered
upon the production order and cost sheet. The wages of
the engineers and firemen should be entered upon the power
costs and distribution record.

Pay-Roll (Form 39)

This design is the same as that used in Chapter XIV, but
is used in the present system for pay-roll purposes only.
Except for this difference, the explanation of the form given
in Chapter XIV will apply here.

Analysis of Factory Expenditures (Form 41)

The "Analysis of Factory Expenditures" is used for
analyzing the indirect expenses. The information is ob-
tained from the accounts payable vouchers. The columns
may be headed with the names of the items composing the
indirect expenses; and at the end of a year a summary
sheet may be prepared with the names of these items
entered at the left of the form, and the months of the year
running across the top of the form. This summary sheet
should prove valuable as a comparative statement, showing
the variations in the indirect expenses each month.

That portion of the indirect expenses chargeable
directly to a particular department should be entered on the



;PECIAL ORDER SYSTEM— PROCESS METHOD



205



process card record of that department. The items of the
indirect that are chargeable to the power costs should in a
like manner be entered upon the "Power Costs and Dis-
tribution Record." The remaining items of indirect expense
are distributed on the basis of productive labor.

Process Card Record (Form 45)

Wherever a process cost system can be used, it will give
more accurate results than any other method employed in
cost finding. It is by the process card record and power
cost and distribution record that the principles of the system
are illustrated. The process card record will, of course,
permit of changes according to conditions in manufacture,
not only as to arrangement of columns for the analysis of
costs, but also as to arrangement of the information. The
results to be obtained, however, are the operating hours,
and the various machine or process costs.

To illustrate : The form shown provides for the distribu-
tion of time and cost on the side of the form, and the
operations at the top of the various columns. By leaving
the columns last mentioned blank, and using a separate card
for each operation or machine, the columns may be headed
according to days, weeks or months, without changing in
any way the ruling shown, and without affecting the results
to be accomplished. On the other hand, the form may be
re-designed, the distribution of the time and cost be entered
at the top of the columns, the operations entered on the
side, and the form used as a daily, weekly or monthly record
for all operations in the plant. Where this is done, and
the form used for recording daily transactions, naturally a
new sheet or card must be used each day, and summarized
by the week or month.

The entry from the time records on this card will show
the machine hours of operation and the idle machine time.



2o6 COST ACCOUNTING

Under the captions "Day Work" and "Piece Work" will
be entered the labor cost for each day. Under the caption
"Supplies" will be entered the cost of supplies, as shown
by the report of material delivered, and under the caption
"Power" will be shown the power cost as taken from the
"Record of Power Costs and Distribution."

The next item, "Floor Space," is the rent, or other
charges which take the place of rent if the building is
owned. These are obtained from the analysis of factory
expenditures. The total floor space of the plant is to be
ascertained by departments, and this total divided into the
total cost of the floor space will give the cost per square
foot. The space occupied by each machine or process
should be calculated in square feet, and this number multi-
plied by the cost per square foot, will give the amount to be
charged for floor space. A permanent schedule should be on
hand stating the various divisions of floor space.

Where the property and plant are owned by an individual
or company, the amount of rental will be ascertained by
taking into consideration, interest, taxes, maintenance,
insurance, and any other items relating to the cost of the
ground or building. Under the caption "Maintenance" the
cost is obtained from the time reports and from material
requisitions or reports of material delivered. "Deprecia-
tion" should come from a permanent schedule, to be made up
so that a fixed charge, based on the machine charge for
actual working hours, may be made against each month's
operation, and divided among the machines or processes.

The "Insurance" item is taken from a schedule compiled
from the total amount of insurance paid, that part of
the insurance applying to the machinery being divided
departmentally among the various operating departments.

The information under the caption "Department In-
direct" is obtained from the analysis of factory expenditures,



SPECIAL ORDER SYSTEM— PROCESS METHOD



207



which shows the indirect expenses chargeable to different
operating departments which are not already classified on
the process cost card.

The last item, "Indirect Expenses," can be obtained from
the analysis of factory expenditures by taking the balance
of the indirect expenses for the cost period, and dividing
this amount by the machine hours. The rate per hour thus
ascertained, multiplied by the hours charged to each
machine or operation, will give the amount chargeable to
this machine or operation.

It will now^ be seen that all the costs relating to manu-
facturing, except material, have been charged against
machines or operations. The total operating cost per hour
will now be calculated for each machine or operation. The
rate obtained is then applied to the various orders passing
through any or all of the machines or operations, according
to the time consumed, by multiplying the number of hours
by the rate per hour, the result being the process or machine
costs. The information contained on the process card
record is transferred to the production order and cost
record.

Power Cost and Distribution (Form 46)

This record, as to labor costs, is made up from the time
reports. The rental, depreciation, and insurance items are
entered from the prepared schedules already referred to.
The record of repair costs will come from the time reports,
and also from the material requisitions or reports of
material delivered. Oil, waste, etc., will also come from the
material requisitions or reports of material delivered.

The total of this power cost is divided by the total
horse-power hours of all machines as actually operated, to
obtain the rate per horse-power hour. This unit rate or
horse-power cost per hour is multiplied by the total number



2o8 COST ACCOUNTING

of operating hours of each machine, and the amount extended
in the column headed "Power Costs." The total of this
column should equal the total shown in the column headed
"Costs" in the analysis of power cost.

Production Order and Cost Sheet (Form i6)

The original of this form has been referred to pre-
viously as a production order. The explanation which
follows applies only to the duplicate copy. The information
under the caption "Operations" is taken from the time re-
ports of the employees, chargeable to the order. The
entries are for time only, and a summary of the time
records for this purpose should be made.

It does not make any difference how many employees
are engaged on one operation, or what their rate may be, as
the total number of hours for each operation or machine
is all that is entered on this record from the time reports.
At the end of the month the total time in each operating
column is shown, and the process or machine rate entered,
this latter information being obtained from the process card
record.

The total number of hours, multiplied by the rate per
hour of each operation, will give the process or machine
costs chargeable to the order, according to operation or
machine. The total of the various operations will give the
total cost chargeable to the order, including indirect or
overhead expenses.

The information under "Material Used" will be taken
from the report of material delivered, and the total entered
after the word "Material" under the caption "Summary."
The total cost of the order is obtained by adding the process
cost to the material cost.

Below the total cost may be entered the quantity of the
order, the price per pi.ece, where it is applicable, the selling



SPECIAL ORDER SYSTEM— PROCESS METHOD



J 09



price and gross profit. The cost of the order is entered
under the proper classification in the finished stock records,
and the information under "Selhng Price" should be used
in billing the order for shipment. The cost and selling
price may also be used in the analysis of cost of sales.

Other Forms Used

Stock Record, Finished Product (Form 56

Bill and Shipping Order (Form 62)

Credit Certificate (Form 63)

Register of Sales and Costs (Form 64)

Inventory Test (Form 60)

Statement of Profit and Loss (Form 68)

Balance Sheet (Form 69)

The general explanation of these forms m Chapter XIV
is sufficient to show their use in the present system.

Explanation of Chart and Summary of Entries

Subsidiary Forms and Records

The forms necessary to record the authorization and
purchase of materials and supplies, and to record the other
expenditures incurred, are as follows :

(i) Purchase Requisition

(2) Purchase Order

(3) Invoice

All these are used in the same manner as described in
the previous system.

The accounts payable voucher is used for the purpose
of classifying the expenditures preparatory to their entry
on the register of accounts payable. The information



2IO COST ACCOUNTING

necessary to classify the expenditures on the accounts pay-
able voucher is obtained from the invoice in the case of
materials and supplies or indirect expenses, and from the
pay-roll in the case of direct and indirect labor.

The forms used in receiving, storing, and requisitioning
raw material and supplies are used in the same manner as
in the previous system.

The report of material delivered is used to show the
raw material and supplies put into operation; and the in-
formation relating to raw material is transferred to the
"Production Order and Cost Sheet," while the information
relating to the supplies is transferred to either the process
card records or the power cost and distribution records.

The compilation of the cost data is made upon the pro-
duction order and cost sheet. The information for the
material charged is obtained from the report of material
delivered. The information for the labor and indirect
expense charges is obtained from the process card record,
together with the time reports, which show the productive
labor time upon each particular order.

The productive labor cost is transferred to the process
card records or the power cost and distribution records from
the time reports, which are summarized upon the pay-roll
for pay-roll purposes and entered upon the accounts payable
voucher.

The information for the analysis of factory expenditures
is obtained from the accounts payable voucher, and is trans-
ferred to either the power cost and distribution records or
the process card records. Afterwards all information on
the power cost and distribution records is transferred to
the process card records.

The cost of the finished stock orders or finished parts
is transferred to the respective stock records ; and in case
any finished parts are put back into operation for completion,



SPECIAL ORDER SYS TEM— PROCESS METHOD 211

the cost of such parts is transferred to the cost sheet. When
finished parts or finished stock are shipped, the stock records
are credited, and an entry is made upon the register of sales
and costs from the duplicate of the hill and shipping order.
When merchandise is returned by a customer, a report
of material received is made out, which supplies the data
for (i) the credit certificate, (2) transferring such mer-
chandise back into either part-finished or finished stock, and
(3) making the proper entrv uDon the register of sales and
costs.

Method of Control

The cost records in this system are controlled by means
of a "Factory" account, which is kept in the general
ledger. This account is debited with all the factory charges
of material, labor and indirect expenses when the Accounts
Payable account is credited. The Factory account is credited
W'ith the cost of the sales when these are charged to the
various sales accounts. The analysis of the Factory account
is shown by accounts which are kept in the factory ledger,
and its balance should agree with the total of the balances
shown by the accounts in the factory ledger.

Factory Ledger Accounts

The following accounts are kept in the factory ledger :

( 1 ) Raw Material and Supplies

(2) Direct Labor

(3) Indirect Expense

(4) Power Costs

(5) Process Costs

(6) Work in Process

(7) Part-Finished Stock

(8) Finished Stock



212 COST ACCOUNTING

The Raw Material and Supplies account is a controlling
account for the raw stock records, and shows in total what
is shown by the raw stock records in detail. It is debited
with all purchases of raw material and supplies from an
analysis of the "Factory" column in the register of accounts
payable. It is credited with any allowances, and with the
total amount of material and supplies delivered to the
operating departments.

The Direct Labor account is debited with the total
amount of the productive labor from the analysis of the
"Factory" column in the register of accounts payable, and
is credited in total from the summaries showing the dis-
tribution of productive labor when this latter is charged
either to the process costs or power cost accounts.

The Indirect Expense account is debited from an
analysis of the "Factory" column in the register of accounts
payable with the items composing the indirect when these
are incurred, and is credited from the analysis of factory
expenditures with the distribution of the indirect expenses
when these are charged either to process costs or power
costs.

The Power Costs account is debited with the supplies
necessary for repair and maintenance of the machines, as
per report of material delivered ; with the amount of the
labor as per the time reports summary, and with the indirect
expenses chargeable to the various machines as per analysis
of factory expenditures. It is credited from the "Power
Costs and Distribution Summary" with the distribution of
the total cost when this is charged to the process costs.

The Process Costs account is debited with direct labor


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Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 13 of 19)