Jerome Lee Nicholson.

Cost accounting, theory and practice online

. (page 9 of 19)
Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 9 of 19)
Font size
QR-code for this ebook

and of the object of each question he may ask. In other
words, the examination should be systematic and thorough.


The examination should begin where the raw material
is received, and end with the office records. It should
follow step by step each process of manufacture, includ-
ing the auxiliary activities of the plant as they arise in
connection with the operations. Circumstances will de-
termine just where, along this line, the power plant
should be inspected, but the application and transmission
of power should be considered in connection with each

The general type of system will be suggested by the
nature of the product and processes, and one of the first


considerations must be to see that the hnes are properly-
drawn between processes, so as to provide for a working
system of operating departments. As far as possible,
each department should be limited to single operations,
in order that the costs may be analyzed in the same

The necessary information for the installation of a cost
system may be divided into four general classifications, viz. :

(i) Raw material

(2) Power, machinery and processes

(3) Direct labor

(4) Indirect labor, supplies and gen-
eral indirect expenses

Raw Material and Storeroom

Under raw material, it should be noted how the raw
material is received, checked, stored and put into opera-
tion. It should then be followed through the factory,
step by step, until it is ready for sale as finished stock.
The maximum and minimum quantities necessary should
be known, and the disposition or utilization of waste and
scrap material should be looked into carefully. Special
attention should be given to the methods of storing
material and part-finished stock, and to the possibility
of improvements along that line. If a stock system is
not used, there is no one place where leaks are more
likely to be found than in the storeroom. The ordinary
manufacturer insists that his cash be kept exact to the
cent, while hundreds of dollars' worth of material may lie
around in different parts of the plant with no effective
methods of safeguarding it, or even of showing when parts
of it have disappeared. The extra trouble of keeping a
stock system is usually paid for many times over by the


saving of stock and the practical value and convenience
of being able to tell at any time just what stock is on
hand and where it is.

As a rule, the best plan is to have one storeroom cen-
trally located; this, however, is not always practicable.
For instance, pig iron should be unloaded in the yards
close to the cupola, and certain materials must sometimes
be shipped direct to an operating department and not
opened until used.

Power, Machinery and Processes

The information relative to machinery should include
cost, floor space, and, in fact, all data necessary for the
calculation of assignable indirect expenses.

It should be determined whether tests for power have
ever been made, and if the conditions make it desirable,
the tests should be brought up to date.

The general arrangement of the departments and
machinery should be inspected very closely, with the idea
of making the whole process as continuous as possible.
Much time and money are wasted in rehandling material,
when machines are placed in disadvantageous positions.

The average and maximum efficiency of machines
should be known, and whether they are automatic or
otherwise. This latter point is often important in arrang-
ing details for the gathering and compiling of costs. If
a machine rate is to be used, the examination is, of course,
more detailed and thorough than in the case of the pro-
ductive labor method.


The number of men occupied in productive labor must
be recorded for each department, and distinguished from
those occupied on indirect labor. The entire labor force of



the plant must be classified in this way according to depart-
ments. The wages paid are not a matter for immediate
consideration, though the method of payment is im-
portant, as it may make considerable difference in the
design of time cards, and often in the method of dis-
tributing the indirect expenses.

The information regarding machines and necessary
supplies must also be arranged according to departments,
so that these items may be used in calculating the depart-
mental indirect expenses.

Indirect Expenses

The last step is to classify all the general expenses so
as to provide for an analysis by items. Expenses that can
be connected with any particular operation should be dis-
tinguished from the general expenses; and expenses such
as depreciation, insurance, heat, etc., should be dissected
and apportioned over the departments and plant as a
whole, according to the plan to be used.

IMuch of the data relative to labor, supplies, and gen-
eral operating expenses may be found in the general
accounting books, but whether or not the accounts in
these books will be useful for classification of expenses
depends entirely upon how they have been kept. When
the accounts show the expenses well itemized and
arranged, they may present valuable information which
would otherwise have to be determined by estimate or experi-
ment. The manufacturer may not care to have his whole
bookkeeping system revised, and this should be borne
in mind in arranging the details of the cost accounts.


In addition to collecting constructive information
along the general lines mentioned, the examiner should



keep in mind many other considerations which relate to
efficiency. Some of these have already been mentioned or
impHed, but it would be well to classify them along
definite lines. They do not apply to any particular part
of the examination; but every phase of manufacturing
should be criticized from an efficiency standpoint.


The underlying purpose of organization is to bring
each and every activity of a plant under the notice and
control of the men responsible for its proper operation.
Thus, in inspecting any department, its relation to the pre-
ceding and succeeding departments, and the methods by
which its operations are reported and controlled by the
shop manager, should be carefully studied. The whole
field is so large that it is only possible to suggest certain
necessary lines of investigation. For instance, storeroom
facilities and the stock system in use, as mentioned be-
fore, should be reported upon, and the report should also
cover part-finished stock, the assembling department,
tool-room, patterns and dies, defective work reports, the
method of requisitioning material and supplies, handling
of time reports, inspection of work, the packing and clean-
ing departments, how production orders are issued and
production reports made out, how the work is planned
in advance, how excess time on operations is accounted
for and how responsibility is defined. These and many
other questions arise during the course of the examina-

Mechanical Aids

Besides the examination of the regular machinery,
attention should be directed to the auxiliary mechanical
service, which is a very important factor in running a shop



to the best advantage. This field, Hke that of organiza-
tion, is wide; but the following subjects are suggested
which may give rise to practical ideas: time clocks, time
stamps, patent time cards, carrying belts, automatic
counters, arrangements of yard service, factory telephones,
mechanical devices in the of^ce, standard jigs and dies,
special arrangements for heavy or peculiar tools, etc.


The matter of heat, light, and ventilation is so im-
portant that it requires special attention. Bad air makes
the workmen dull and listless, and everything drags,
simply because there isn't enough oxygen on hand to
supply the blood properly. Less work is done at a greater
expense of effort.


A watch should be kept for "leaks," especially in
places where they may exist unnoticed. The wastes that
appear in lost or spoiled material and time idled away are
among the more prominent and more costly leaks. Large
losses are sometimes incurred by failure to completely
check material received, as in cases where barrels are not
opened to see that they are full, etc. Spoiled material is
likely to be concealed if there is not a system of material
requisitions in use. Time may be lost through poor fore-
manship, especially where departments are not properly
balanced, and where the men in one department wait for
another department to send work to them.

Time lost in carrying materials, crowding of aisles with
goods, scattering of men's time on odd jobs, unnecessary
consumption of power, waste of scrap material, incon-
venience in location of tools and dies, poor toilet facilities,
etc., are all signs that losses are being incurred which, al-



though small in any special case, amount to considerable
sums when spread over a whole factory for a period of

The examiner should also take note of all places where
the work seems to be going on half-heartedly. Such places
will require attention and perhaps special measures, but
the returns will justify it.


While the examiner's mind is occupied with the active
details of his examination, he must be subconsciously con-
sidering how each feature that develops is going to find
a place in the cost system, and what special modifications
are needed to make the system fit the conditions. Thus
his information is of two kinds : first, the constructive
information necessary to the designing of the system; and
second, a critical knowledge of the defects and inefificient
spots that need immediate attention. It must not be
thought, however, that an examination will discover any-
thing but surface defects; it remains for the cost system
itself to detect and locate those beneath the surface.

Details of Examination Information

It is suggested that the examiner have with him a
schedule of questions which will serve both to classify his
information and to keep him from overlooking more or
less important details. The questions which follow, while
suitable for this purpose, are not expected to cover every
possible condition. The examiner in charge will be able,
however, to cover the greater portion of the investigation
by use of these queries and instructions, and to supple-
ment them when necessary. It is impossible to obtain
too much information, and nothing is too unimportant
to notice.



Schedule of Questions for Examination of a Plant

(i) Purchase Division

1. Are purchases made on verbal or written requisi-
tions? Give full particulars.

2. Is there any one responsible head, or are purchases
made by several? Particulars.

3. Are complete records made of quotations received?

4. Is any accounting done in this division? If so, de-
scribe it.

5. Describe filing methods, including catalogues.

6. Are any orders placed verbally? If so, are they
promptly confirmed in writing?

7. Obtain copies of all forms and books used.

8. Give ofifice force and duties of each.

9. Remarks.

(2) Receiving Department

1. How are incoming goods handled?

2. Are there any mechanical appliances? Describe.

3. What records are maintained?

4. Is there a track scale and a car record kept? If
not, how are car-loads received and checked out ?

5. How are partial shipments checked up and re-

6. Is trucking equipment owned? What sort?

7. Obtain copies of report or record forms, books, etc.

8. If any goods are returned, how is accounting

9. How are overs, shorts or damaged goods reported
to purchasing department?

10. Remarks.



(3) Storeroom

1. Are storerooms maintained for all raw materials
and parts?

2. How many, and where located ?

3. Do employees have access to stores?

4. Are heavy goods conveniently arranged as to
classes and convenience of handling? Are they properly
marked or tagged, and are there signs or other methods
for locating classes?

5. Are there any mechanical devices such as trolleys,
tiering machines, cars, etc.? If so, describe.

6. Are there bins, shelves, racks, etc., of sufficient
capacity, and are they arranged to best advantage for
economical handling of goods?

7. Are bin cards used?

8. Are parts manufactured and carried in stock?

9. Could any such parts be purchased for less money?

10. Is raw material carried in stock after passing
through a process? If so, describe and state why.

11. How is the quality of goods tested when received?

12. What checks are maintained as to correctness of
deliveries to manufacturing departments?

13. How are such deliveries made, and are there tote
boxes or other standard devices used?

14. Are all deliveries covered by requisitions? If not,
note exceptions and reasons.

15. Does storekeeper have copies of all standard bills
of material or specifications?

16. Are factory supplies furnished to departments on
requisition? If not, how handled?

17. Are obsolete parts or surplus stock reported regu-
larly to the management?

18. How are returnable containers handled and ac-
counted for?



19. How does storekeeper request purchases?

20. Is a perpetual inventory maintained, and, if so, how
verified ?

21. Does such inventory show quantities only, or values
and costs as well?

22. How many employees, and what are their duties ?

23. Does department appear to be efficiently handled?

24. How does storekeeper handle excess materials
issued and returned to stores?

25. Obtain copies of every form or record.

26. Remarks.

(4) Dry Kilns

1. Type of kilns used; i.e., direct heat or vapor
process? Describe equipment and manner of operating.

2. Is exhaust steam or live steam used?

3. Is lumber measured or weighed in and out? If not,
how is quantity dried accounted for?

4. Is there any special fire protection? If so, what?

5. How far away from factory buildings are dry kilns

6. Is any attempt made to record cost of drying? If
so, state particulars.

7. How many employees, and what are their duties?

8. Obtain copies of forms, if any.

9. Remarks.

(5) Power Department

1. Obtain list of equipment, stating number, kind and
capacity of engines, boilers, dynamos, pumps, heaters,
economizers, traps, condensers, etc., etc.

2. Is equipment kept in thoroughly good condition?

3. How frequently are boilers cleaned ?

4. Is there any reserve capacity?


5. Is equipment deficient in any respect? If so, par-

6. Are there any special safeguards against accidents?

7. Is the power plant in one unit, or in two or more
units ? Describe each, if more than one.

8. Is factory heated from central power plant?

9. Is any record kept of power and heat distribution?

10. Is any record kept of light distribution?

11. Is any record kept of air distribution?

12. Is any record kept of engine ef^ciency?

13. Is any record kept of fuel consumption?

14. Is exhaust steam returned to boilers ?

15. How many employees, and what are their duties?

16. Obtain forms.

17. Remarks.

(6) Manufacturing — General

1. Obtain list of articles manufactured, or furnish

2. How many plants, and where located ? Describe.

3. Are any other plants controlled by the concern?
If so, explain relations and how handled.

4. Obtain sketch of floor plans of plant being exam-
ined and indicate space occupied by each department.
Obtain blueprint if possible.

5. Obtain land area, and how occupied.

6. Is plant owned or rented?

7. Could plant be improved as to arrangement with-
out undue expense ?

8. Is any record kept as to maintenance of buildings
and machiner}^?

9. Does such record apply to buildings and machines
separately, or is it in bulk ?

10. Are there special fire hydrants, standpipes and hose?



11. Are they inspected frequently and kept in good

12. Are there any fire-drills?

13. Are there ample fire-escapes and exits?

14. Are they kept clean and readily accessible?

15. Does superintendent appear to be qualified to
handle the plant without interference?

16. Is he given full authority, or is his authority limited
in any way? Give particulars.

17. Are duties of all foremen and assistants well de-
fined and thoroughly understood?

18. Are departments properly balanced? If not, give

19. Are there any time-clocks, and are employees super-
vised when they ring in and out?

20. Are any mechanical devices used for keeping time
on jobs? If so, describe.

21. Is there any special system of interdepartment
conveyance? If so, describe. If not, or deficient, state im-
provement necessary or desirable.

22. Is there a good system of shop telephones?

23. Does production consist of standard lines, special
orders, or both ? State proportion of both.

24. Are orders for standard lines put through for con-
siderable quantities of finished product or for parts to be
assembled as w^anted?

25. Is there any system of planning work in advance?
If so, describe it.

26. How are orders made out and put in work?

27. Are sub-orders or tags made out, or does original
shop order follow the work?

28. How are orders numbered or identified?

29. What is the sequence of travel or routing from de-
partment to department?


30. Are there any daily reports of progress made?

31. How is production reported and verified?

32. Are completed orders checked with originals to
verify instructions or to compare estimates of time and

T,;^. How are the interdepartment orders handled ; i.e.,
orders for work in form of repairs, or other items not
directly concerned with production?

34. How is experimental work handled?

35. Are any parts interchangeable, and to what extent?

36. Is finished product shipped out as completed, or
carried in stock?

37. Are individual records kept concerning late and
absent time of men?

38. Do they have any strikes or other labor troubles
of consequence?

39. How is waste material treated?

40. Obtain forms and books.

41. Remarks.

(7) Manufacturing Departments

Obtain the following information for each department,
so far as the questions apply, and supply any additional
data necessary to cover requirements fully :

1. Name of department.

2. Name of foreman.

3. Number of employees.

4. How many piece-workers? How many day-
workers ?

5. How many non-productive workers? Obtain any
desirable information in this connection.

6. Does foreman appear to be competent?



7. Has he any assistants?

8. Are instructions given to workers verbally or in

9. Are blueprints or drawings furnished in all cases
where desirable?

10. Obtain list of machines in this department and
their uses where name will not clearly indicate their

1 1. Mention any that are automatic or semi-automatic,
and describe groups operated by one person or team.

12. Are any machines obsolete or inefficient? If so,
name them.

13. Are machines arranged to best advantage for
economical operation? Suggest improvements.

14. Are there any high-speed machines or tools used?
If so, indicate them.

15. Are such machines operated as rated by makers, or
have any attempts been made to increase their efficiency?

16. Are there counters on any machines? If so, indi-
cate them and mention other machines where counters
would be useful.

17. If tempering or heating furnaces are employed,
state for what purpose, what kind of fuel used, and describe

18. Are all machines numbered?

19. Is there a separate tool-room ?

20. Are tools numbered or catalogued?

21. Is there a good tool system for checking tools?

22. Do workmen keep own tools in repair, or is there
a toolmaker employed for that purpose?

23. Are machines and transmission appliances guarded
to protect employees against accidents?

24. Are there any tool or pattern maintenance records?


25. Are there any efficiency records in connection with
either men or machines?

26. What sort of power is employed in this department
and how distributed; i. e., by individual motors, group
motors, a single motor, or direct from line shaft?

2y. Is there any record of power cost either for de-
partment as a whole or as applied to machines?

28. Is natural lighting good? If deficient, explain why
and — if possible — suggest improvements.

29. Obtain complete Hst of operations performed in
this department, indicating hand and machine work.
Describe any that are out of the ordinary.

30. Are operations standardized as to time, machines,
speed, tools, etc.?

31. Report on what may be defective methods of per-
forming operations, suggesting improvements where pos-

32. Describe timekeeping system.

33. Is there any lost or idle time? If so, explain why.

34. Is there any bonus or premium system in force?

35. How are materials obtained and charged to pro-

36. Is it necessary to issue materials in excess of im-
mediate requirements at times? If so, how is the excess
cared for?

37. How is defective work reported and disposed of?

38. Are there any methods in vogue to prevent the re-
placing of materials that have been spoiled?

39. Do requisitions for replaced material indicate the
purpose of the withdrawal?

40. Is there any undue waste of material or time? If
so, is there any apparent remedy?

41. How is legitimate waste material disposed of? If
used again, describe.


42. Is all work properly tested or inspected?

43. Is work inspected by operation, or only when com-

44. Are there any delays due to faults of other de-
partments? If so, describe them.

45. Is any attempt made to keep shop in any constant
degree of humidity? How is it ventilated?

46. if manner of reporting production or progress in
this department differs in any way from others, specify

47. How are parts, belonging to repair jobs, stored
and marked?

48. Are any samples made for show-rooms, demon-
stration or salesmen? If so, how handled as to account-

49. Is there any friction or dissatisfaction of any sort?
If so, explain.

50. Does the department appear to be efficient as a
whole, or is there an indication of laxity?

51. Obtain copies of all forms.

52. Remarks.

(8) Repair Department

Examine on same basis as manufacturing departments.

(9) Foundry

Apply same inquiries as used for manufacturing de-
partments as far as they will fit, and, in addition, ascer-
tain various classes of moulding, viz., machine, snap, floor,
pit, regular bench, etc., and the various classes of output,
the character of mixtures, if mixtures vary in same melt,
number of melts per week, cleaning process, manner of
making calculations at present, manner of ascertaining
production and waste in a steel foundry, whether work is



planned in advance, whether flasks, rigging and tools are
cared for and placed conveniently for use, whether iron
or wooden flasks are used, noting any special methods of
moulding, condition of cupolas, furnaces or other equip-
ment, etc.

(lo) Plating-room

Same inquiries as for manufacturing departments to
be used wherever applicable. Ascertain whether anodes
or salts are used and how consumption and amount of
deposit is ascertained. Note any special processes, and
also quantities of small pieces immersed on one hanger,
difficulties encountered, etc.

(ii) Wood- working Shops

The same line of investigation as outlined for manu-
facturing departments should be pursued, bearing in mind
that wastes and consumption are the most puzzling
features of such departments or plants. Ascertain par-
ticularly from an accounting standpoint the methods em-
ployed for determining consumption, and the treatment
of wastes suitable for further use.

(12) Assembling

1. State fully nature of work performed in this de-
partment and methods pursued.

2. If any packing is done here, describe it, and furnish
information as under "Packing Department."

3. How many employees, and how distributed?

4. Does piece or day rate plan prevail?

5. Is work done by individuals or by teams?

6. What record of time is kept?

7. Is department efficient, or otherwise ?

8. If otherwise, how can condition be remedied?

1 2 3 4 5 6 7 9 11 12 13 14 15 16 17 18 19

Online LibraryJerome Lee NicholsonCost accounting, theory and practice → online text (page 9 of 19)