Jerome Lee Nicholson.

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tion "Cost Price," is taken either from the stock record
or cost record showing the cost of the articles that are
to be shipped, and the entry according to selling price


and cost price is made on the register of sales and costs,
according to the classification provided for in that record.

Credit Certificate (Form 63)

This is intended for recording the allowances to cus-
tomers either for returned goods or for a special claim.
In case of returned goods, the information will be taken
from the material received record, and in case of a special
allowance, from correspondence. In the case of returned
merchandise, the information under the caption "Selling
Price" should be taken from the customer's record, and
the information under the caption "Cost Price," from
the cost or finished stock record.

The original copy is sent to the customer, showing
the amount of credit allowed; and the entries in the books
are made from the duplicate copy which is placed on file.
The amount of the selling price and cost price is entered
on a separate sheet in the register of sales and costs,
according to the classification of the sales, in the same
manner as the sales were entered. In case a special allow-
ance is made, the entry should be made through the
journal, the customer being credited and the proper
account being charged.

Register of Sales and Costs (Forms 64, 65)

When the sales are not classified as to departments or
article, the sales and costs may be summarized by means
of an adding machine; but if the sales are classified to any
extent, it is well to use a register of sales and costs for
the purpose of recording the information, this being entered
daily in total or in detail. It may be necessary to have a
separate sheet for each department.

A register of sales and costs may provide for record-
ing the date, the number, the name and address of cus-




tomer, amount and cost of sales, and be provided with
columns showing the classification as to the product or
department. In addition, the total amount of the sale
column, or accounts receivable column, may be divided
to show the classification of the customers' accounts.

There are two plans in general use for keeping a
register of sales and costs:

(i) Providing for the classification of the sales
according to sales and costs for posting to the
department and controlHng accounts only, this
method being used where the posting to the cus-
tomer is made from the bill.

(2) Providing for the same information so far
as the division of the sales and costs into depart-
ments is concerned, but providing extra columns
for entering each bill according to name, terms,
etc., all postings being made from the register.

The choice of a plan will depend on the general bill-
ing system in use.

Form 64 illustrates the second plan, whereby the
customers' accounts are entered and distributed, accord-
ing to departments, into sales and cost of sales. Provi-
sion is also made on this form for showing the gross
profit on each order. The customers' accounts are
charged and at the end of the month the total of the
accounts receivable column is debited to that account in
the general ledger. The totals of the sales columns are
credited to the department sales accounts in the general
ledger, and the totals of the cost of sales columns are
charged to the department sales accounts. Where a con-
trolling account is kept of the finished stock, the total
of the cost of sales columns is credited to that account.


Form 65 is a special form for the purpose of analyzing
sales according to material, labor and indirect, and is
intended to be used only in a system for proving esti-
mated costs.

Cost Journal

A "Cost Journal" is practically the same as the
ordinary two-column journal, provision being made for the
date, folio for reference purposes, a wide column for
explanations, and two money columns, one for the debits
and the other for the credits.

Its function is to record and arrange the information
obtained from the original factory records for posting to
the accounts in the operating or factory ledger.

It is not always necessary to use a cost journal as a
posting medium, since the postings may often be made
from the original factory records.

Operating or Factory Ledger

The "Factory Ledger" is that record in cost account-
ing which arranges and classifies the information con-
tained in the original factory records.

The ruling of the factory ledger will depend to some
extent upon the type of system in use. In some cases
the ordinary ledger ruling is quite sufificient, while in
other cases columns should be added for showing a de-
tailed analysis.

The accounts usually found in the "Factory Ledger"

( 1 ) Raw Material and Supplies Account

(2) Labor Account

(3) Indirect Expense Account

(4) Work in Process Account

(5) Part-Finished Stock Account


(6) Finished Stock Account

(7) General or Private Ledger Account

(i) Raw Material and Supplies Account

This account shows in total the information contained
In detail in the raw material record. It is debited with
all receipts of raw material and supplies, and credited
with all deliveries to operating departments, and with
any material returned to the creditor. Therefore the
balance at the end of the cost period should agree with
the total of the balances represented by the detailed
records of raw material stock, thus creating a control
and check upon the work and information contained in
the detailed stock records.

(2) Labor Account

j The amount of the direct labor, as shown by the pay-
roll, is debited to the Labor account; and this account
is credited with the amounts of direct labor distributed
to the various departments, orders, jobs, or articles, in
accordance with the system used. The advantage of
having the cost period in agreement with the pay-roll
periods is noticeable here, because if the cost period and
pay-roll period are in agreement, no balance will appear
upon this account.

(3) Indirect Expense Account

The Indirect Expense account is debited w^ith the
expenses incurred, and credited with any allowances made
by creditors on expense items, and with the amounts dis-
tributed to each job, order, article, or department.
Separate accounts may be kept in the ledger for each
class of indirect expense. When, however, the indirect
expenses are kept in one account, they should be analyzed


on the statement of factory expenditures. The balance
of the Indirect Expense account is generally a debit, rep-
resenting prepaid expenses to be carried as deferred charges.

(4) Work in Process Account

For the purpose of controlHng the work in process,
accounts may be kept in the factory ledger in any one of
three ways:

(i) An account styled "Work in Process" may be
kept, which will show in total what is shown in detail by
the cost sheets. The account is debited with the material,
labor and indirect expenses chargeable to the various
departments, orders, jobs, or articles upon which opera-
tions have been begun, and is credited with the total
cost of the part-finished or finished work. The balance of the
account then represents the amount of work still in process,
and should agree with the cost of the unfinished work as
shown by the detailed cost sheets.

(2) Accounts may be kept which will show the work
in process in each operating department. When work
is transferred to a department the Work in Process account
of that department is debited with any cost incurred in
previous operating departments, and to this is added the
material, labor and overhead cost incurred in the depart-
ment itself. When the product is transferred to another
department the account is credited with the total cost,
thus balancing as to that particular work. Any balance
remaining shows the cost of the unfinished work in that
department, and should agree with the detailed depart-
mental cost sheets of jobs, orders, or articles.

(3) Accounts may be kept with each order, job or
article. The material, labor and indirect expense, as
distributed, are debited to the order, job or article, and
the account is credited with the total cost when the work



is completed and transferred to stock. The balance of each
account shows the costs incurred on the unfinished work.

(5) Part-Finished Stock Account

This account is debited with the cost of part-finished
stock as far as it has been incurred, and credited with
the cost of any part-finished stock requisitioned out,
whether for the purpose of completing, assembling, or sell-
ing. The balance shows the cost of the part-finished
stock on hand, and should agree with the total of the
balances as shown in the detailed records of part-finished

(6) Finished Stock Account

The Finished Stock account is kept in the same manner
as the other stock accounts, being debited with the
cost of the product transferred to finished stock, and
also with the cost of any finished stock returned by cus-
tomers. The account is credited with the cost of the
product sold, the balance representing the cost of the
finished stock on hand, which should agree with the total
of the balances as taken from the detailed finished stock

(7) General or Private Ledger Account

This account serves a twofold purpose : first, as the
connecting link between the cost records and the financial
records ; and second, as what may be termed the balancing
account of the factory ledger. By means of this account
a trial balance of the factory ledger may be prepared at
the end of a cost period, which should prove the mathe-
matical accuracy of the postings to the factory ledger,
independently of the financial records.

This account is debited or credited as may be neces-


sary when any information entering into the cost records |i
is obtained from the financial records. For instance, i
when the material, labor or indirect expenses are sum- '
marized from the accounts payable vouchers in the factory
ledger columns of the register of accounts payable, and
the details of this factory ledger column are posted to
the debit of the material, labor, and indirect expense ac-
counts in the factory ledger, the General or Private Ledger
account is credited. This procedure maintains the equi-
librium of the factory ledger and also gives the general or
private ledger credit for the expenditures which were in-
curred for the factory. On the other hand, when shipments
of finished or part-finished stock are made, and the stock
accounts in the factory ledger are credited, a charge is
made to the General or Private Ledger account, for the
reason that the merchandise has practically left the fac-
tory and the factory records as well, and is now included
in the accounts upon the financial books. The balance
of this General or Private Ledger account is generally
a credit balance and should agree with the debit balance
of the Factory Ledger account in the private or general

Illustrative Journal Entries

In concluding the description of the records for com-
piling cost data, it may be advisable to trace the more
common entries through the journal, showing how the
accounts in the factory ledger are affected. It should be
borne in mind that these entries pertain only to the cost
records, and are given merely to illustrate the entries
which are most likely to be used, as it would be practi-
cally impossible to give entries covering every point under
the specific conditions of various plants. Some of the
entries which follow might be combined, thereby saving


time in posting, but they are presented here in their
simplest forms for the sake of greater clearness.

Raw Material and Supplies Account

To General or Private Ledger Account ....

For the total amount of material
and supplies purchased and received
during the period.

Labor Account

To General Ledger or Private Ledger

Account ....

For the total amount of wages dur-
ing the period.

Indirect Expenses Account

To General or Private Ledger Account ....

For the total amount of indirect ex-
penses incurred during the period.

Work in Process, Department, Job, Order

or Article Accounts

To Material and Supplies Account .... ....

Total amount of materials and sup-
plies requisitioned out and chargeable
to the product.

Work in Process, Department, Job, Order

or Article Accounts

Indirect Expense Accounts

To Labor Account


To distribute the pay-roll for the
period, charging the direct labor di-
rectly to the product or operation,
and the indirect labor to the indirect

Work in Process, Department, Job, Order

or Article Accounts

To Indirect Expense Accounts

For the total amount of indirect ex-
penses distributed and charged to the

Part-Finished or Finished Stock Account. .

To Work in Process, Department, Job,

Order or Article Accounts

For the total amount of product
transferred to the stock, either part-
finished or finished.

Work in Process, Department, Job, Order

or Article Accounts

To Part-Finished Stock

For the total amount of part-finished
stock transferred to operating de-
partments to be completed.

General Ledger or Private Ledger Account

To Part-Finished or Finished Stock


For the total amount of the cost
of the goods sold during the period.



Methods of Controlling Cost Records

The description and analysis of the financial records
as a whole is a subject for special books; but since the
cost records are practically an analysis of an account or
accounts appearing in the financial records, it is necessary
to consider the accounts which are afifected. In a com-
plete cost system the cost records may be controlled and
interlocked with the financial records in one of two ways :

(i) Accounts may be kept in the general ledger,
which should control the various items of production cost
in its various stages. For instance, accounts should be
kept with material, labor and indirect expenses, work
in process, and part-finished and finished stock, entries
being made to these accounts in the same manner as if
they were kept in the factory ledger.

(2) An account styled the "Factory Ledger Account"
may be kept in this general ledger. This account repre-
sents in total what is shown in detail by the factory or
cost records, and the balance is usually a debit, agree-
ing with the credit balance of the General or Private
Ledger account in the factory ledger. The Factory
Ledger account is debited with all charges to the factory,
as represented by the total of the factory ledger column
in the register of accounts payable, the details of which


are analyzed in the factory ledger accounts. The Fac-
tory Ledger account is credited with the total cost of
sales as shown by the register of sales and costs, when
this is debited to the Sales account.

Sales Accounts

The sales accounts may be divided or classified accord-
ing to departments — departments here meaning divisions
of the articles sold. They are debited with the cost of
merchandise sold at the time this cost is credited to the
Factory Ledger account. They are credited with the
total amount of the sales — less returns — as obtained
from the register of sales and costs, at the time this cost
is charged to the Accounts Receivable controlling ac-
count. The balances of the sales accounts represent the
gross profit or loss upon each different classification of the

Selling Expenses

A single account may be kept embracing all selling
expenses, and this account may be analyzed at the end
of the cost period; but it may also be well, where practi-
cable, to keep separate accounts showing the selling
expenses for each classification of the sales accounts.
Part of the advertising, commissions, salaries, etc., can
be related directly to certain classes of product ; and these
products should always bear such expenses. The ex-
penses that cannot be so charged may be kept in a
General Selling Expense account, and apportioned over
the classified accounts on some arbitrary basis, such as
the cost of sales, or the volume of business done. If
there is a balance in the General Selling Expense account,
it is generally a debit, and may represent a deferred
charge — that is, a certain amount of selling expense in-


ciirred but not yet distributed, for the reason that it
is chargeable to future operations of the business.

Separate accounts are usually kept for each class of
selling expense, to show the amounts spent for each
item. Each account should be charged with the amount
spent, and credited with deductions for any allowances
made, and with the amount distributed to the Profit and
Loss accounts.

Administrative Expenses

i Attention is called to the fact that the distinction be-
tween administrative expenses and production costs on
the one hand, and selling expenses on the other, may be
an artificial one only, as in many cases the administrative
expenses are incurred through action or effort that may
be in the interest of either production or selling. There-
fore it should be borne in mind that any expenses that
afTect either the manufacturing or selling departments
should be charged, wherever practicable, to the proper
classification in the department affected. Some of the
items usually listed as administrative expenses are as

Salaries of officers
' Salaries of office clerks

Rent of offices

Light and heat of offices

Telegraph and telephone

Stationery and printing


Legal expenses

Car fares and incidentals






These accounts are charged with the expenses in-
curred, and credited with any allowances. The balance
may be distributed over the various classifications of the
sales upon some such basis as used in the distribution of
the selling expenses.

Monthly Profit and Loss Statement (Form 68)

The nature and size of the business, as well as the
scope and type of the accounting system, will largely
determine the nature of the profit and loss statement to
be prepared. It may deal only with the totals of the vari-
ous departments or classes of product, showing the sales,
cost of sales, gross profit, selling expenses, administrative
expenses, and net profit or loss ; or, on the other hand,
it may be prepared so as to disclose the details of the cost
elements, selling expenses and administrative expenses,
together with various percentages which are of value for
comparative purposes.

All records, including both the financial and cost
accounts, should be arranged so as to facilitate the prepa-
ration of statements.

All information called for by the profit and loss state-
ment may be obtained from the private or general ledger.
Under the caption "Departments" will be shown the
classification of the various selling products. Under the
caption "Sales" in the statement of profit and loss will
be entered the total debit and credit of the departmental
accounts; under the sub-caption "Amount" the sales;
and under the sub-caption "Costs" the cost of the sales,
this cost being made up of the complete factory cost of
the product, including all indirect expenses. Under the
caption "Gross Profit" is entered the difference between
the amount of the sales and the costs, as shown in the
private or general ledger. Under the caption "Expenses"



the totals of the selling and of the administrative ex-
penses should be entered, at the bottom of the page, in
their proper columns. These totals may then be prorated
over the dififerent departments on the basis of the per-
centage of the cost of the sales, and the amount to be
charged to each department entered in the proper posi-
tion in its column. Under the sub-caption "Total" is
shown the total of the two classifications of expenses;
and under the caption "Net Profit" is shown the net
profit or loss of each selling department, obtained by
deducting the total expenses from the gross profit. In
the last column are shown the percentages of net profit
in each department.

The preparation of this statement from the private or
general ledger, at the end of the month, will be merely
a matter of copying ofif the balances of the departmental
accounts, and distributing the balances of the expense

This statement gives a summary of all the trans-
actions of the business for each month, and represents
the final outcome of all factory operations that affect the
cost of goods sold during the month.

It should be borne in mind that every figure appear-
ing on this statement is supported by other references ;
and any figures shown in the- "Net Profit" column which
are not satisfactory to the management may be investi-
gated, the cause of any loss in percentage shown, the
reason ascertained, and the remedy applied.

Balance Sheet (Form 69)

The balance sheet is the statement which shows the
financial status of an enterprise, and is prepared monthly
from the accounts in the general or private ledger. Under
the caption "Current Month" is stated the balance of the




account for the month in question, and under the caption
"Increase or Decrease" is shown the increase or decrease
from the balance of the preceding month.

One of the most important points in connection with
a monthly financial statement is the fact that it brings
before the management every month the financial status
of the company as a whole, showing the profits and losses,
assets and liabihties.

Under the so-called "Inventory Method," profit or
loss is only ascertained at long intervals; and in the
majority of cases, an unsatisfactory exhibit of earnings
cannot be investigated sufficiently to be of any material \
benefit. Even where such an investigation is possible and
results in a betterment of conditions, there is usually a '
large loss already incurred due to the delay in discover- i
ing the defective conditions, whereas, under an account- '
ing system in which earnings are shown monthly in
analytical form, any loss or leakage can be immediately
investigated, and can, as a rule, be stopped at once, or else
be so minimized that no serious loss is incurred. The
advantage to the manufacturer is obvious.

Salesmen's Costs (Form 66) '

In addition to the records already described, it is
often advisable to keep a record of salesmen's costs, which
will prove valuable as a basis for comparing the ability of ,
one man with another, or one territory or period with

Provision may be made for showing the amount of
sales, cost of sales and gross profit, and the salaries, com-
missions and traveling expenses of each man, together
with percentages. All information of this nature may be
used to advantage in adjusting salaries, commissions and
expenses of the salesmen.



Plant and Tool Records (Form 70)

Valuable information which can be used in determin-
ing the rate of depreciation, appraising the equipment,
etc., is often obtained from records showing the cost
value of machinery, tools or other equipment. Besides
making provision for recording the first cost, the form
may be designed to provide for installation charges, expenses
for repairs and maintenance, depreciation, etc. This infor-
mation may prove especially valuable in determining whether
it is cheaper to maintain the old equipment or to buy new.

In plants where a tool-room is part of the factory
organization, it is well to keep tool records in the same
way as the material stock record, classifying and arrang-
ing the tools so as to show the quantity, and those available
for each particular job or machine.



Reasons for Examination

The basis of any successful cost system must be
sought in the nature of the manufacturing operations,
and this presupposes a physical examination of the plant.
It is not enough to inspect the books, for an analysis of
accounts cannot give all the necessary data. The extent
and character of the information needed is limited only
by the boundaries of the business; and its classification
is a matter of highest importance to the systematizes He
should have a definite knowledge of how to go at things,

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Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 8 of 19)