Jerome Lee Nicholson.

Cost accounting, theory and practice online

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plies to the regular output of the factory.

(2) Shop production order, which provides for
construction, renewals, or changes in the factory.

(3) Repair production order, for making neces-
sary repairs to the equipment.

As many copies of the production order may be pre-
pared as the conditions demand. One copy may go to the
stock clerk, so that he will know what the requisitions


should call for, and prevent employees from taking out
materials for an order not issued. When a copy is used in
this way, the stock clerk should check the material that re-
lates to the order, and should not deliver any extra material
except upon the authority of the superintendent or man-
ager, any such supplementary requisition giving the rea-
son why additional material is required. Used in this
way, the production order guards against dishonesty, and
brings to light mistakes and defective work.

A second copy may be sent to the shipping clerk with
directions as to the disposition of the finished product, so
as to facilitate deliveries. A copy may also be kept at
hand in the manager's office to inform him of the orders
that are being worked on in the shop.

When an order is issued covering a product that
passes through several departments, some of which re-
quire different specifications, or when the work on the
order is to go on simultaneously in several departments,
sub-production orders may be issued for the work of each
department. If the work is well systematized in the fac-
tory, sub-production orders may be issued at once, to all
departments, stating the exact day the order is supposed
to reach them. If the work falls behind the schedule, it
is known at once; and the foreman of the department in
which the delay occurs is asked to explain. This method
of keeping work up to schedule time is especially valuable
in case of orders where shipment is guaranteed by a cer-
tain date.

The production order may also be in coupon form,
each department filling out its coupon and turning it in
at the time the job is transferred to the next department.
The work can thus be located at any time by the coupons
on file. When used in this way, the production order
takes the place of the piece tag which is often used to fol-


low a job through the plant, and which shows that the
necessary material for a particular job has not been ap-
propriated for other uses.

If the production order is used to record the cost in
addition to regulating the production, the form should
be designed to show the material used, employees' time
and wages, and indirect expenses. Provision may also be
made for the classifying of such special indirect expenses
as can be charged directly to the order. The design
should be such that the cost clerk may arrange the data
and ascertain the total cost of the order directly on the
form. The order then serves the purposes both of collec-
tion and of compilation.

When an order covers large contract work it is often
desirable to divide it among departments and into sec-
tions — "sections" here meaning not parts of the depart-
ment, but parts of the work to be done. The time of the
employees should then be reported, showing the time con-
sumed in each department on each section of the work.
By using section numbers it is possible to compare costs
with estimates, and to follow the progress of the work
more intelligently.

(6) Material Requisition or Bill of Material (Forms 18-23)

(i) A "Material Requisition" is generally used where
the material consumed on orders is subject to constant
changes. It is made out by the department requiring the
stock, and presented to the stock clerk, who may com-
pare the requisition with the corresponding production
order before honoring it. The requisition should be dated
and numbered, should show in detail the description and
quantity of the material wanted, should be signed by the
party receiving the material, and approved by some one in
authority. Provision for costing the material requisi-



tioned out will depend upon the stock system in use —
that is, upon whether the system provides for showing
quantity only, or both quantity and amount.

(2) A "Bill of Material" may be compared with a regu-
lar formula, and is used when consumption of material is
definite. It takes the place of material requisitions in fac-
tories where the same articles are manufactured repeatedly,
using the same amount of material. A bill of material is
made out for each article manufactured, and a copy given to
the stock clerk. When the production order is used as a
material requisition all that is necessary is to present a copy
of the same to the stock clerk, and he will give out the
material according to the amount to be manufactured.

No material should ever be issued not covered by the
bill of material, unless on a supplementary material requi-
sition, showing either that there is something wrong in
the original bill, or that there has been defective material
or work. Nor should any material ever be given out with-
out a receipt from the party taking it.

Where many different kinds of material are used in
one article, and the product of the plant is fairly standard,
the bill of material may be printed in quantities accord-
ing to articles, and the printed copies used as separate
requisitions. When the material for an order is required,
the bill of material given to the stock clerk should specify
the order number, as well as the number of articles.
When the material is drawn out the stock clerk should
check it and have it receipted for as it is delivered.

In the event of material being returned to stock, a
storeroom credit slip should be issued and be attached
to the original requisition, or, if preferred, a regular form
of material requisition or bill of material may be used
and stamped "Returned."

Where operations are suspended, to be taken up again


later, or where the product is not assembled until after
sale, much of the material finds its way back to store-
rooms, and must be drawn out by supplementary requisi-
tions. The part-finished stock or finished parts' requisi-
tion is made out by the assembling department, or by the
sales department if the parts are sold separately.

Where a process system is used, and the cost is
charged to the process, and not to an order number, the
bill of material may be made out according to operating
departments; and the list of material classification need
cover only the items used in that particular department or

(7) Inventory Test (Form 60)

This form is intended only for testing the correctness
of the book inventory, i. c, the stock record, and may be
used in connection with raw material, part-finished and
finished stock, and sometimes with goods in process of
manufacture, depending upon the system in use. Where
inventories are not taken at frequent intervals, some
means of testing the correctness of the book inventory
should be provided. The reliability of cost figures de-
pends to a great extent upon the correctness of the rec-
ords showing the quantity of stock received and delivered
to the operating departments of the factory.

Whenever it is desired to test the correctness of the
book inventory as to any particular class of material, the
stock clerk should enter the article and location only on
the inventory form, after which the amount of the ma-
terial on hand should be counted and entered under the
caption "Actual Count." The amount on hand, as shown
by the book inventory, should then be entered under the
caption "Book Inventory," and if these figures are the
same as the actual count, the form should be dated and



filed for reference. If, on the contrary, there is a dififer-
ence between the book inventory and actual count, the
difference should be stated, and, if possible, the cause

A difiference between the actual count and the book
inventory will represent either errors in the stock records
or material taken out of stock without a requisition. If
the difference cannot be located, so that the proper cor-
rections may be made on the records, the amount of the
difiference should be charged or credited as the case may
be to the proper stores account, and posted to the account
styled "Over, Short and Damage."

Recording the Labor Cost

Labor often constitutes the most important and in-
fluential element in manufacturing and production cost.
Small variations in the methods of handling the men and
their reports may lead to great differences in results.
That this importance is realized is shown by the large
number of firms manufacturing devices for regulating
labor and gathering and compiling the labor costs. Time
clocks, time stamps, patent time cards, etc., of many
makes are on the market for factory use. The complex
and variable conditions that exist in manufacturing
naturally necessitate a wide variety of methods and forms
for gathering the costs.

All forms for this purpose may be termed "Time Re-
ports." Without regard to any particular design, the
successful operation of such reports depends largely on
the manner in which they are introduced. Clerical labor
on the part of factory employees should be reduced to a
minimum, so as not to antagonize the men or the man-
agement; and what detail work is necessary should be
made as much a matter of easy routine as possible.



Requisites of Time Reports

j Some of the questions that should be considered in
choosing or designing time reports are as follows:

(i) Is the form to be filled in by an employee,
or a time clerk, or will a mechanical device such as
a time stamp be used?

The first two methods are subject to the criticisms
that they are inaccurate, give opportunity for "doctor-
ing" reports, interrupt the w^ork too much, or require too
much clerical labor. The time stamp or time clock reme-
dies much of this; and in the end the installation of such
devices will be less costly than the trouble which arises
from other methods, especially if the factory is of any
size or complexity.

(2) Is the form to show the time daily, w^eekly
or monthly?

(3) Is the form to show time only, or both time
and cost?

If cost is to be included this w-ill call for additional
columns for the cost and perhaps its distribution.

(4) Is it to show direct production costs only,
indirect only, or a combination of both?

(5) Is it to be used by individual employees or
by department groups?

Combination reports for all the men doing the same
class of work may be entered on a single sheet, which
may also be arranged in a pay-roll form and used as a
part of the general pay-roll.


(6) What is the wage system in use?

If piece-work, the report need show the quantities
and time only, the cost being left to appear on the pay-
roll and cost records. When the work is partly day-work
and partly piece-work, either additional columns or sepa-
rate forms may be chosen. If a sHding wage scale is
used, as in the dififerential rate or premium system, the
costs should appear on the report, separate columns being
added if desired, to show the extra wages earned. The
rates may also be printed on the card.

(7) Are the reports based on the time for one
article or process, or on the number of articles per
unit of time? H

If the latter, the report may provide for data covering
several days or a week. If the former, the report should
have columns showing the labor cost applying to each
order number or article, unless the time is summarized
on another sheet for this purpose.

(8) Is the labor to be charged to the product
direct, or to the machine or process under a ma-
chine rate method?

In either case a time unit or a quantity unit may be
used as standard.

If the labor is to be charged to the product or the
order as a whole, provision may be made on the reports
for summarizing the charges of the different parts, though
these are generally recapitulated on separate sheets.
When a machine rate system is in efifect, the name or order
number of the article, machine, or process chargeable



should be shown. It is often desirable to have a space on
the report for defective work; and in a machine rate sys-
tem the reports may include the distribution of other
charges, thus making the form a statement of the costs
of a particular machine.

The whole system of time reports should be devised
with certain purposes in view. It should be possible to
compile and analyze them to find the labor cost of (i)
any order as a whole, or any part of it; (2) each article
of a class; (3) any operation or process, either on the
basis of each article or order, or per unit of time.

The time and cost devoted to production should be
easily separated from the time and cost of non-productive
labor. Further, the arrangement of the time report
should be designed, to facilitate the preparation of the
pay-roll. Occasionally a system can be devised whereby,
as already suggested, the time reports turned in become
the pay-roll without any further recapitulation. A time
report where quantities are shown may be used in certain
conditions as a production report, which, when sum-
marized by departments, will give the production report
of the whole department.

Forms of Time Reports

A number of time report forms are shown in the pres-
ent volume (Forms 26-34), not with the intention of
standardizing any of them, but in order that the different
conditions encountered in gathering and recording labor
cost may be properly covered, and in order to suggest
methods of gathering labor cost data.

Daily Time Report (Form 26)

This is a daily time report, intended to be made out
by the workman. It is used where the labor cost is


charged to a classification of product, and not to an
order number or process. The report may be used either
for day-work or piece-work, in factories where a quan-
tity of the same article is produced.

Daily Time Report (Form 27)

This also is a daily time report, to be made out by
the workman. It is intended for collating the cost data
according to department, order number and section num-
ber. Provision is made for showing the time of begin-
ning and finishing, the amount of production — defective
and good — and the amount of the labor cost.

Weekly Time Report (Form 28)

This is a weekly time report, made out by the work-
man, showing the quantity produced and labor cost accord-
ing to department, machine number, order number and
operation. Provision is made for showing the time daily
for a week, and the total time at the end of the week.

Daily Time Report (Form 29)

This form is a daily record made out by the work-
man, showing the quantity produced and labor cost ac-
cording to department and order number. It may be used
either in day-work or piece-work. The special feature of
this form is its provision for showing the material cost of
the production as turned out daily.

Daily Time Record (Form 30)

This design is intended to be used as a daily record
for one order number in conjunction with a time stamp.
While the operations are printed on the card to save
writing, only one operation can be registered at a time.
This is done by using a check mark for the operation


worked on. The design provides for showing the quan-
tity, total time, rate and cost, and provision is also made
for extra wages under a premium system. The design
may also be used where the labor charge is made against
the machine..

Daily Time Record (Form 31)

This form is also intended to be used as a daily record
for one order number or operation in connection with a
time clock. The mechanism of the clock, when the card
is inserted, punches the beginning and ending time. The
record also provides for the reading of the elapsed time
without calculation. It shows the order number, account
number and amount of production, as well as the time,
rate and amount.

Daily Time Record (Form 32)

This design provides a daily record of the time spent
on an operation, the starting and ending time being
punched in the columns provided on the left-hand side of
the card. The elapsed time must be calculated and en-
tered on the face of the card. The operation should be
checked ofif, and the cost should show according to de-
partment or order number. Provision is made for show-
ing quantity and premium rate.

Under the caption "Waiting Time" on this record is
shown the amount of lost time incurred by the operator
in waiting for work, due to either accident or neglect in
the operating department.

Daily Time Record (Form 33)'

This record is to be made out daily by the workman,
and provides for charging his time against a machine,
operation or process. It shows the total machine hours,


time started and time finished. Provision is also made
for the premium plan of paying wages.

Self-Figuring Time Card (Forms 34a-c)

Forms 34a-c are intended for use in small plants, or
where a few workmen only are employed on a certain
job, so that the time cost may be summarized on the card.

A daily time card is provided for each workman who
renders direct labor in the manufacture of a product.
This is in the form of a disk, representing the dial of a
clock. The time divisions indicated distinctively are the
hour, the quarter hour, and five-minute intervals. Each
card is serially numbered, a series being allotted to each
class of product or article. This card is issued to the work-
man on his arrival in the morning, his arriving time
being punched on the card by the superintendent, time-
keeper, foreman or employer, as the case may be. On
leaving the shop for any reason the workman must pre-
sent his card for punching, so that this card serves the
purpose of a time clock.

The most thorough records are obtained when every
punch mark made on the card indicates the identity of
the person punching it, in the same way that railway con-
ductors indicate their identity by their punch mark on

The daily time card is intended to be used in combina-
tion with the self-figuring cost card. This, comprising
also a job card in disk form, is only slightly larger than
the time card. The cost card accumulates upon it the
following data:

(i) The record or identity of each workman
who renders direct labor on that job.

(2) The number of the job and the date.


(3) The time and exact money cost of each
workman's labor on the job. As many as eight dif-
ferent wage rates are automatically figured on the
card, so that the cost of the time the respective
workers spent on that job is readily determined.

(4) The cost of materials directly used on the

(5) The indirect or overhead costs properly
chargeable to the job.

The cost card has a series of concentric circles, each
constituting in efifect a column of numbers. These are
the money equivalents of the time divisions or intervals
shown on the time card. Each circle represents twelve
hours of labor cost, shown in five-minute intervals, and
each at a different wage rate.

One circle, for example, is for a $20.00 per week work-
man, another for an $18.00 man, another for a $16.00 man,
and so on.

For illustration, a workman upon arrival is given his
time card with a perforation showing the time. He is
also given his job card, which indicates his job; and he
sets to work — the time of beginning being punched on
his time card. When he has finished his part of the work
on that job, he places his time card on the job card so
that his "starting" perforation is over the starting point
of time cost in his circle or wage level. He then punches
both cards at the spot representing his finished time. By
this punch he has indicated the number of cents' worth
of his labor to be charged to that job, without any figur-
ing. The next workman at the same wage rate who
works on that job, follows the same course as the first,
except that when indicating his finishing time he lays
his time card over the job card, so that through his "start-


ing" perforation he sees the "stopping" mark of the pre-
vious workman. In this way the direct labor cost is
cumulatively recorded on each job. If the rate of the
second man is different, he places his starting punch on
the starting point of the cost card as before, but in the
circle which represents his rate of pay. As each job card
of this standard design has only the costs of twelve hours
of work for each of eight wage rates, more than one job
card should be used where more than this time is con-

On the back of each card is a ruled space for summing
up the total costs. When a cost card has been filled, the
total costs it contains are noted on a fresh card in the
total cost space; and the process is repeated as often as is



With the cost data once at hand, as found in the vari-
ous material and time reports, the next step is to arrange
and summarize this information. The present chapter
shows what becomes of the information already recorded,
and how it eventually finds its way into the factory or
operating ledger.

Records and Forms Generally Used

The records listed below are those used for compiling
the cost data. They are discussed in the order in which
they would probably be put into operation, rather than in
the order in which they are listed. It will be noticed that
these records divide themselves into two groups; first,
those serving the twofold purpose of recording financial
transactions and also of furnishing information for the
cost records; and, second, those dealing almost entirely
with data relating to costs.

(i) Financial Records
Purchase Journal
Accounts Payable Voucher
Register of Accounts Payable

Billing and Shipping Records
Credit Certificate
Register of Sales and Costs



(2) Cost Records
Material Received Summary
Report of Material Delivered
Analysis of Pay-Roll
Statement of Factory Expenditures
Process and Machine Cost Records
Production Report or Production Summary
Defective Work Report
Cost Sheet

Stock Records — Part-Finished Stock
Stock Records — Finished Stock
Cost Journal
Operating or Factory Ledger

Purchase Journal (Forms 5, 6)

A record of this character, sometimes called the "Pur- "
chase Analysis," is frequently used in the simpler cost

Form 5 should be used only where an account is kept
of the purchases according to classification of material or
product. The form is suitable where a proof system for
estimating costs is in use.

Form 6 is an analysis of the purchases and expenses,
and should be employed where a voucher system is not
in use. Where this record is introduced, accounts are
opened in the general ledger for the various classifications
shown. At the end of the month the "Total Amount"
column is credited to the Accounts Payable account, and
the total of the various columns up to and including
administrative expenses is charged to the debit of the re-
spective accounts.

The column "Sundry Accounts" is intended for classi-
fications not otherwise provided for. These accounts are



either posted individually to the debit of the extra classi-
fications, or they are summarized and so posted at the
end of the month.

Accounts Payable Voucher (Forms 7, 8)

The "Accounts Payable Voucher" is a form used for
listing and classifying all expenditures incurred, whether
for material, labor, indirect expenses, selling expenses and
administrative expenses, or for additions to the plant,
furniture and fixtures, etc. The form provides for record-
ing the number of voucher, name of creditor, date, amount
and classification of the items contained in the invoices
attached to the voucher, and also for information as to
the payment of each; as date, bank and check number,
approval, etc. In order to facilitate the making of proper
classifications, and their entry in the accounts payable
register, it is well to have the names of the accounts
which are most frequently affected printed upon the
voucher. This also saves the time involved in writing in the
names of the accounts every time a voucher is prepared.

The invoices from the creditors are attached to the
accounts payable voucher and also copies of the purchase

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Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 6 of 19)