H. JULIUS LUNT
ASSOCIATE OF THE INSTITUTE OF CHARTERED ACCOUNTANTS
(HONOURS) ; ASSOCIATE OF THE CHARTERED INSTITUTE
OF SECRETARIES (FIRST CERTIFICATE OF MERIT) ;
FELLOW OF THE INSTITUTE OF COST AND
Revised and Enlarged
SIR ISAAC PITMAN & SONS, LTD.
PARKER STREET, KINGSWAY, W.C.2
BATH, MELBOURNE, TORONTO, NEW YORK
SIR ISAAC PITMAN & SONS, LTD.
PREFACE TO SECOND EDITION
IN the preparation of a second edition of the MANUAL OF
COST ACCOUNTS opportunity has been afforded for a
rearrangement of the text, and for the addition of further
examples and models which help to illustrate more fully
the aims and methods of the various systems in use.
Along with the correct ascertainment of Production
Costs, Modern Accountancy seeks to obtain from cost
statistics a means by which control over running expenses
and economical use of capital can be secured ; and by the
regular preparation of interim Profit and Loss statements
and Balance Sheets to ensure that criticism of manufac-
turing operations from the financial standpoint which is
essential to commercial success.
The author is indebted to many friends for their kind
assistance which is gratefully acknowledged.
PREFACE ....... ill
I. INTRODUCTION 1
II. DEFINITIONS 8
III. SINGLE (OUTPUT) COSTS . . . .11
IV. DEPARTMENTAL COSTS . . . .19
V. PROCESS COSTS ...... 28
VI. TEXTILE ACCOUNTS PROCESS COST METHOD 35
VII. JOB COSTING TERMINAL COSTS ... 43
VIII. MULTIPLE COSTS LABOUR .... 55
IX. MULTIPLE COSTS MATERIAL ... 64
X. MULTIPLE COSTS EXPENSES ... 76
XI. MULTIPLE COSTS COST LEDGER . . .109
XII. FOUNDRY ACCOUNTS . . . . .135
XIII. WORKS ROUTINE 140
XIV. OPERATING (WORKING) COSTS . . .156
XV. COST RECORDS AND REPORTS . . .159
XVI. STATISTICAL PRESENTATION OF RESULTS . 169
XVII. EXAMINATION QUESTIONS . . . .181
THE subject of Cost Accounts has come into prominence
in recent times because of the increased interest in more
A United States Government Committee has made an
official inquiry into the subject and states that " an
amazing number of manufacturers, particularly the smaller
ones, have no adequate system for determining their
costs, and price their goods arbitrarily." Probably in
this country less than 10 per cent of the manufacturing
firms have an efficient system of Cost Accounts.
Many manufacturers are content to have a periodical
Trading and Profit and Loss Account which merely shows
the result of their operations as a whole. From these
accounts, however, nothing can be learnt as to any partic-
ular work which is making big profit, or as to work which
may be entailing heavy loss. Transactions of both kinds
mingle together in making up the totals recorded in the
In some cases the financial accounts can be arranged
so as to classify the expenses in sufficient detail and provide a
return of the cost of a standard unit, department or process.
A separate system of accounts is required in other cases
which must analyse the financial results so as to determine
the cost of material used in the manufacture of any
particular unit ; the wages expended on it ; and the other
sources of expense which are incurred to bring it to per-
fection and dispose of it on the market. These must be
2 MANUAL OF COST ACCOUNTS
charged accurately against selling price of each unit so
that the profit and loss can be ascertained.
It is the object of financial accounts to obtain and main-
tain accurate records of the transactions and results of a
business, in the most direct manner possible and with a
minimum of detail.
Contrasted with this view of affairs is the standpoint of
the manufacturer or salesman requiring to estimate for
future work, and having to regard each separate sale as
a possible profit or loss according to the price he offers.
In fixing such price he must not be so high as to lose the
order nor must he be so low as to lose his profit.
In merchanting, where goods are sold substantially
in the same form as when purchased, little difficulty
arises because the mere addition of a percentage is sufficient
to cover the known establishment expenses. Fluctua-
tions of market must be watched, but there are few
opportunities for sources of leakage, as, for example,
wages paid without adequate corresponding return. This
may occur easily in a manufacturing business, especially
in the case of indirect or non-productive labour.
In large businesses where vast sums are laid out in the
purchase of materials and payment of wages, it is essential
that each Ib. of material, or each hour of time, should be
traceable so that it may ultimately be charged to a partic-
ular customer, who, at the time when the outlay is made,
may quite possibly be unknown.
Further, in order to control the work that is put in
hand, and to organize it to ensure that it must prove
profitable, very great detail in the records will be essential.
The aim of a manufacturer in seeking profits must
always be to conduct operations on lines of the highest
efficiency, thus obtaining the maximum product for the
labour expended, which is not the same thing at all as
the payment of the lowest wages. Correct costing means
high efficiency with high wages and a minimum of
An economically managed factory receives the bulk of
the orders by reason of the fact that it is able to tender
on a competitive basis, to cut the price, at the same time
ensuring a fair profit ; and to execute the order with
confidence and speed. An economically managed factory
is not necessarily one in which low wages and salaries
are paid. Experience has proved that the reverse is often
It is further noticeable that a sound costing system
plays an important part in works organization and expense
control. When the factors which are causing expense can
be localized and scrutinized, it becomes possible to obtain
considerable economies which are not brought to light in
a works where there is no system to make someone
responsible at each stage.
The outlay of capital whether permanent as hi buildings
and plant or circulating as in materials and wages can be
controlled in detail by means of Cost Accounts ; here are
recorded all details of raw material, its use, its value from
time to time ; what labour is spent on it, and the expense
incurred until the commodity emerges as a finished and
Method of Presentation.
The method of presentation of cost results is also
important. It is obvious that little or nothing can be
learned from a ledger record of the results, representing
profits or losses on innumerable jobs. There must be a
periodical tabulation of results ; comparisons of the cost
of like jobs with one another ; comparisons of all jobs
with estimates and regular management reports based on
the information thus obtained.
Relationship with Financial Accounts.
It is essential that close relationship should exist between
the costing and the financial accounts. A sound system
and regular comparisons will ensure agreement between
the results shown in the two sets of accounts ; and the
4 MANUAL OF COST ACCOUNTS
value of the cost results is enormously increased when this
agreement can be demonstrated ; so that continuous cost
records and not merely occasional tests should be main-
tained. Where for detailed results reliance has to be
placed upon occasional tests, the accounts should be so
arranged as to provide a means of comparison and check
upon such data.
The control of the cost system by means of a Cost
Ledger (or Work-in-Progress) Account in the financial
books can be strongly recommended on these grounds.
Costs and Estimates.
Cost Accounts also differ from estimates ; they are
historical records and are useful in preparing estimates
of future costs, which, however, are of the nature of fore-
casts, being based on expectations of market changes,
wages fluctuations, and expense variation.
The chief points of difference are
Estimates are based upon
1 . Market quotations ; Costs only take note
2. Expectations as to price of actual price paid
fluctuations ; for material used and
3. Labour rates ; and wages paid ; actual
4. Expense rates current at expenses current at
time of quoting. time of execution.
5. Estimates may be given
regardless of profit to secure
The true place for cost records in regard to estimating is
that they form a reliable history of past work from which
future plans may be formed by taking into account
alterations in any or all of the factors.
Estimates cannot be prepared from the general financial
returns in a business handling a variety of products, with
the same exactness that is obtainable when Cost Accounts
are kept, and thus over- or under- estimating is inevitable.
It is only necessary to mention that under-estimating
leads to unprofitable work, and over-estimating means loss
of profitable orders, to see the double evil that may ensue.
The unit of work or production may be a ton of coal
at a colliery, a sack of flour at a flour mill, or a ton of
steel at a steel works. In such cases a method of Single
Cost may be used.
To meet the case of Railways, Tramways, Carriers and
similar businesses rendering services rather than producing
goods, the method of Operating Cost applies. This method
is on similar lines to Single Cost, but with a unit of a train-
mile, wagon-mile, car-mile or ton-mile, as the case may be
with a system of expense classification following the
organization of the operating and maintenance departments.
By another method a factory may be divided into
departments, in each of which there is a separate unit of
production. In such cases, in order to frame a Cost
Account system, the first step is to provide separate
Departmental Trading and Profit and Loss Accounts.
The unit may be a ton of oil at an oil mill, a piece of
cloth at a print works, or a ton of hydrochloric acid at a
chemical works. In these cases a method of Process
Costs is used, by which the cost of each process through
which the material passes will be shown.
The unit in the case of a builder and contractor is the
contract undertaken. Each separate contract must have
an individual account showing its profit or loss. This is
the methods of preparing Cost Accounts for each job, and
is known as Terminal Costs, because each unit of work
proceeds independently of the others, whether it be a house
or works in the case of a builder or a railway bridge or
steamship in the case of a contractor.
The most complicated costing work is found in an
extensive works making numerous types of machines.
The processes are carried on regardless of the particular
article for which the work is ultimately intended ; and
6 MANUAL OF COST ACCOUNTS
material passing through the same processes will ultimately
be found made up into machines of different capacity,
design, purpose and value.
This method is termed Multiple Cost, and it is a develop-
ment of the principle of charging costs to each job, and
is applicable to a great variety of trades.
In large works many costing systems are in use in
different departments ; the means being adapted to suit
the work. At some stages short cuts will be possible and
it is part of the Cost Accountant's methods to introduce
systems which will eliminate some of the detail of individual
Job Costing and give correct records.
What Cost Accounts Show.
Cost Accounts are accordingly adopted in manufacturing
businesses, and give an analytical view of the same records
as are condensed in the financial accounts, so as to show
the cost of production per unit of work turned out. They
1. A record of results for statistical purposes, fore-
casts ; and for obtaining interim Profit and Loss Statements
and approximate Balance Sheets.
2. A guide for future estimates, quotations, and for
price-fixing, especially when output may be dependent
upon price limitations.
3. A means to reducing cost of production by economies
in design, methods and equipment ; or by obtaining
4. A means of control for detecting losses, waste,
unremunerative expense and for improving organization.
It is essential that such accounts be accurate, otherwise
the value of the results is clouded by uncertainty. They
must necessarily be detailed, and the usual difficulty is
to obtain sufficient detail without incurring great expense
in salaries. On this account every opportunity must be
sought to adopt abbreviated methods and to eliminate
duplication. At the same time it must be borne in mind
that in practical application, the cost of running a sound
costing system is repaid many times over by the economies
which it will effect.
Great difficulty arises in fairly allocating indirect
expenses and the circumstances governing every particular
case must be carefully studied.
Accountants must be able to recommend the prin-
ciples upon which the costing system for a particular
business can most suitably be framed, and to draw up,
in connection with the technical managers, the detailed
accounts, schedules, preliminary records and other details
which may be required ; also to recommend improvements
in methods of routine, particularly with the 'aim of securing
greater accuracy and promptitude in the returns obtained
from the costing system ; and to advise upon various
systems, for which Cost Clerks of differing experience will
Bonus schemes are likely to play an important part in
future arrangements of industry. The success of such
schemes is closely bound up with the working of the
costing system, for it is only by intelligent appreciation of
economies in working, that a degree of efficiency can be
maintained under keen competition which will ensure
regular and substantial profits in any trade ; and the pro-
duction statistics obtainable in the Cost Accounts will be
of vital assistance in such matters.
It is impossible to make the working of any business
fit into a ready-made costing system. The system must
be adapted to suit the business. In every case forms
suitably ruled, and specially drafted schedules for accounts
and record books will be required. These must be
intelligently prepared to suit the circumstances in each case.
It is with the object of providing a summary of the
main principles of this subject that this book is issued ;
and it is hoped that it may meet the needs of students
and afford some assistance to others seeking guidance on
this complex subject.
SINGLE (OUTPUT) COST is applicable to businesses supply-
ing a uniform product where the object is to ascertain
the cost per unit obtained.
DEPARTMENTAL COST is the method employed to
ascertain the profits of departments of a business.
PROCESS COSTING is used to ascertain the cost of each
stage of manufacture where material is passed through
various operations to obtain a final product or result ;
with by-products in many cases at different stages.
JOB COSTS are employed to charge the cost of production
against the different jobs that are undertaken.
TERMINAL COSTS are employed to show the cost of
carrying out contracts and undertakings which are by
their nature entirely separate and are terminated by the
completion of the work.
MULTIPLE COSTS apply to businesses where the products
differ widely in type, value and complexity ; where
similar operations may be used to give widely differ-
ing ultimate results ; where specialization and the
standardization of parts may be extensively adopted.
OPERATING (WORKING) COSTS apply to businesses
carrying on services rather than producing goods.
PRIME COST (or FLAT COST) is the cost of material used
and labour expended directly in producing an article ;
completing a piece of work or carrying on a service.
DIRECT MATERIAL is the material used in the manu-
facture of an article, or in the construction of an
undertaking which can be charged directly to the job
(a) Direct purchases which can be allocated to the job
from the invoice.
(b) Stores material which is withdrawn from general
stores to be charged to specific work.
INDIRECT MATERIAL comprises all materials which are
not capable of being allocated to specific work.
DIRECT LABOUR, also termed Productive labour, is labour
which is expended directly upon the construction of an
article, and may be skilled or unskilled. It is differentiated
INDIRECT or Non-productive labour engaged upon
general services connected with the running of a factory
as a whole.
CHARGEABLE EXPENSES are those which can be allocated
directly to specific jobs.
WORKS EXPENSE is that expense which is properly
concerned with the running of a factory or plant, and is
embraced in the cost of production ; this is sometimes
referred to as Direct Expense.
COST OF PRODUCTION is the Prime Cost plus the propor-
tion of Works Expense properly chargeable against the
production of an article.
WORKS COST, FACTORY COST and MANUFACTURING COST
signify Cost of Production.
INDIRECT EXPENSE includes all expenses of carrying on
a business apart from the conduct of manufacturing
processes ; including, therefore, management, office and
ONCOST, also known as OVERHEAD EXPENSE or ESTAB-
LISHMENT CHARGES, is divided into Works Oncost
signifying the charge which is made in Cost Accounts to
cover Works Expenses ; and Office Oncost, signifying the
charge which is added to Cost of Production to cover
GROSS COST is the Cost of Production, plus the proportion
of General Expenses, including Management, Selling,
Distribution and Office Expense.
10 MANUAL OF COST ACCOUNTS
PRODUCTIVE HOUR method is the system of charging
expenses to jobs on the basis of the hours of Productive
Labour spent on them.
WORK-IN-PROGRESS is the uncompleted work on hand
at any time.
DEPRECIATION is the inherent wastage in value of an
asset due to any cause.
SINGLE (OUTPUT) COSTS
IN the good old days when it was almost undignified to
be able to read or write, a builder or shipwright probably
had little idea of the cost of his operations except what
he obtained by totalling the amount of cash which he had
parted with to complete his work. If his means increased,
he prospered ; if not, then it was adversity and nothing
further could be said about it.
To-day the conduct of large organizations requiring
strict control of vast sums laid out in material and wages
and the determination of responsibility for each detail
leads to the introduction of complicated accounts. In
such cases particularly, and in small businesses also, the
value of knowledge concerning operations in progress
cannot be over-estimated, and it is to provide for this phase
of accounting that Cost Accounts come into use.
Object of Cost Accounts.
The object of keeping Cost Accounts is to be able to
ascertain the cost of any one product, department or
process independently of other work going on in the
factory at the same time. The first gain may be looked
for in reduction of waste in material, time and sundry
stores ; and at the same time a reduction of general
expense rates due to better organization and improved
output. Further, the records of past work form a
valuable base for future efforts.
The means to be adopted to gain this end must vary in
every business. In general terms, the following principles
will apply and the organization of a costing system in any
business must necessarily follow the lines appropriate to
its stage of development.
12 MANUAL OF COST ACCOUNTS
The Trading amd Profit and Loss Accounts may be made
to yield much useful information. They should be drafted
so as to separate manufacturing expenses from administra-
tion and selling expenses, so that the factory cost of the
output can be obtained.
The arrangement of the Trading and Profit and Loss
Accounts should be as follows
(1) Raw Material Accounts to which purchases are
charged ; the materials used will be credited and trans-
ferred to a Manufacturing Account. The total amount
used in any period is obtained by totalling requisitions for
supplies or deliveries of materials ; or by taking stock of
material still in store and transferring the balance as
(2) Manufacturing Account, to which material used,
direct wages and works expenses are charged ; finished
goods are transferred to Finished Goods Account, and
work-in-progress remains as a balance.
(3) Trading and Profit and Loss Account to which is
charged the cost of manufactured goods sold. This is
obtained from the Finished Goods Account after crediting
stock on hand. Expenses of selling and distribution and
general administration are charged here.
Raw materials which directly enter into production and
similarly direct wages engaged upon productive work
must be accounted for separately from indirect material,
e.g. oil for lubricating machinery ; and indirect wages,
e.g. foremen or timekeepers. Further, the Expense
Accounts must show clearly the cost of each source of
expenditure, e.g. such an account as wages, besides being
split up into direct wages and indirect wages must be
further dissected in the accounts so that the Indirect
wages will be grouped as foremen, timekeepers, stores
clerks, etc., each group having its own expense account ;
and in the arrangement of other expense accounts a similar
careful dissection will be required.
SINGLE (OUTPUT) COSTS ' 13
Single Cost is applicable to businesses supplying a
uniform product where the object is to ascertain the cost
per unit produced, e.g. per Ib. of yarn in spinning mills,
per yard of cloth in textile factories, per sack of flour in
a flour mill, per ton of coal in a colliery, per ton of steel
at a steel works.
Manufacturing businesses use Single Costs when turning
out a standard product, but in most instances a division
into departments, each handling a separate range of goods,
will be desirable ; or a division of the cost of manufacturing
a single product into processes or stages of manufacture
will be useful. In these cases the methods described under
Department Cost and Process Cost will be applicable.
Where a common basic unit for the whole production
can be arrived at, the charges in the Manufacturing Account
can be compared between different periods by reducing
each item to the cost per unit for the period.
In the Trading Account the percentage of each item to
the Sales should be stated.
The most convenient period for making up a periodical
cost sheet must be considered. In some businesses a weekly
reckoning is made ; in others a monthly account is con-
sidered adequate ; while in other cases a four-weekly period
with 13 periods to the year is found most satisfactory,
in consequence of the comparison of results not being
disturbed by irregularity in the length of the periods.
Assuming that a monthly period is | to be used, a
Monthly Manufacturing and Trading Account will be
Returns of materials used in quantities and value and
detailed record of production form an essential part of this
system. Material must be priced at actual cost, and
wages must be grouped under productive operations to
enable comparisons to be usefully made.
In addition to values, returns of quantity in respect of all
products should be made so that the volume of waste and
14 MANUAL OF COST ACCOUNTS
WHEAT ACCOUNT No. 1. MANITOBA.
Purchases . .
factoring A/c (at
average cost price) 3,500
Stock on hand . . 1,500
Month of January.
19. . Tons.
Jan. 31. To Wheat :
No. 1. 220
,, ,, ,, 2. 620
Jan. 31. By Trading A/c
, , Flour . .
Offals . .
Loss in Mil-