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records should be written down and the amount of the loss
charged to the Stock Depreciation Account.

Return of Material Used.

In some businesses a weekly summary of Material Issued
serves as a useful guide to the Purchasing Department.

In other cases a monthly inventory of Stores is prepared
and a forecast obtained of the following month's output
programme and material requirements. These details
then show what material must be hastened for delivery
within the period. Minimum reserve stocks must of course
be provided, and the buying policy must be based upon the
anticipated requirements of a more extended period.

Stock Appropriation.

To some extent it is found desirable in practice to keep
Stock Appropriation Ledgers showing to the debit material
or parts on order with outside firms or in the course of
manufacture in own works, and to the credit the require-
ments for orders actually in hand for customers or for stock.
The balance on each account then shows the quantities on
order in excess of prospective requirements, and is of
vital importance to the Planning or Production Depart-
ment. This method is only useful for cases where a
minimum stock cannot be fixed and relied upon to meet
manufacturing needs from time to time. For instance, a
firm manufacturing machinery of numerous designs will
require to ensure supplies of different sizes and varieties
of many different metals, fittings and other equipment to
meet not a fixed minimum of each but a supply of the actual
quantities called for by the orders coming through. It is
the work of the Appropriation Ledgers to ensure that this
supply will be available when called for, and the Stock
Ledgers in the stores office will still show merely the actual
stocks on hand. Where the method of Stock Appropria-
tion is resorted to it is preferable to have independent



74 MANUAL OF COST ACCOUNTS

Appropriation Ledgers for the purpose, rather than to
endeavour to combine this work with the Stores Ledgers,
which indicate the actual stock of stores. The Appropria-
tion Ledgers will then be debited with available stock,
which at stocktaking time consists of all material actually
in stores and material on order ; material called for by
orders already in hand will be credited. Orders placed for
further material are then debited to the account, and the
material required for each order received, as shown by the
specification which is issued to the stores for Buying
Department purposes, should be credited ; the Appropria-
tion Ledger will then show material on order in excess of
what is called for by the orders in hand.

Component Stores.

The General Stores which takes charge of all raw
materials may be divided up into sections to suit the
convenience of the different departments in the factory,
but each should be under the control of the chief storekeeper,
and the records should be kept in the stores office. In
addition to these stores there will probably be a Tool
Stores and Components or Finished Stores.

Finished Stores, whether consisting of complete machines
or components ready for assembly, should be under the
care of the Progress Department who will keep record of the
manufacture and disposal of finished stocks.

The Progress Department will prepare stock orders for
batches of standard parts, so that these can be manufactured
in bulk according to the most economical manufacturing
quantity of each.

The Progress Department will be supplied with copies
of orders received and will appropriate against such orders
the requisite standard parts as they become available.

A minimum quantity of unappropriated parts of each
type will be fixed and the stock orders for renewal will
be issued as the available stock above the minumum is
appropriated.



MULTIPLE COSTS MATERIAL 75

By thus controlling the manufacture of stock parts
strictly in accordance with immediate requirements, the
prompt execution of orders for finished machines
(practically from stock) can be assured and a safeguard is
established against the over-production of some parts,
which is a risk attending mass production systems.



6 (1765)



CHAPTER X

MULTIPLE COSTS EXPENSES

Expenses.

THE charging of expenses fairly and equitably over work
produced is the most difficult part of a Cost Accountant's
duties. It is impossible to determine actual expense in
carrying out a given order for a customer, and the detailed
application of sound principles in the distribution of total
expenses is the only method that can be adopted.

When the output of a factory consists of articles of a
uniform design, the amount of indirect expense attributable
to each can be ascertained by dividing the total amount of
expenses for a definite period, say one month, by the
number of articles produced ; and if it is desired to obtain
a comparison of the expenses with some other basic unit, as
will be necessary if the completed article were only turned
out at certain periods of the year other seasons being
devoted to the manufacture of parts then the amount of
wages in comparison with the expenses will be, in such a
case, a reliable guide. For example, a small engineering
works manufacturing a standardized cream separator can
calculate the cost of each machine by dividing the total
outlay over a period by the number of machines turned
out, or the ratio between the indirect expenses and the
wages should be constant, provided efficient conditions are
maintained.

When a business having run on these lines adds a number
of other products to its output, turning out in addition to
the cream separator a dozen or more other agricultural
implements the method ceases to be effective as a true
indication of the share of the expense to be attributed
to each article because of variations in the work required
to be performed. Further, there is no ready indication in
the accounts of the source of each expense by which

76



MULTIPLE COSTS EXPENSES 77

increases can be investigated and cut off if not remunera-
tive. It is for these reasons that cost accounts come into
operation.

It must not be supposed, of course, that a low expense
rate has any connection with efficient manufacture, because
the expense rate is determined by the equipment provided,
and therefore with expensive equipment there will be a
high expense rate ; but, having ascertained the expense rate
that should result from efficient management, the aim should
be to avoid exceeding such a rate.

Classification of Expenses.

Charges which are grouped under the heading of expense,
also referred to as Works or Establishment Charges,
Overhead Expenses, Oncost, or Burden are divided into

(1) WORKS EXPENSES in which are included all
items that are necessarily involved in the production
of the finished article ready for sale. This heading will
consequently include such items as

Indirect wages including

(a) Foremen and their assistants ;

(b) Shop clerks ;

(c) Timekeepers ;

(d) Storekeepers and stores labourers ;

(e) Power House wages ;
(/) Transportation wages ;
(g) Maintenance services ;
(h) Waiting time ;

(i) Labourers cleaning machine tools and shops ;
(j) Watchmen.

Rent and rates of factory ; or if the premises are
owned, interest on the amount of the outlay may
replace rent.

Power, whether from coal, gas or electricity.
Heating and Lighting.

Insurances Fire, Compensation and National.
Sundry consumable stores oil, waste, etc.



78 MANUAL OF COST ACCOUNTS

Repairs and renewals.
Depreciation.

Salaries of works managers and works clerical staff.
Experimental and research expenditure.
Works stationery.
Welfare, ambulance, etc.

Inspection. This is an example of a charge which

can often be more advantageously made a direct charge

by specific bookings to individual jobs. Where this

is not practicable it will be a works expense. Another

charge of this type is the cost of tool-setting, which

may be a direct charge if the work is specially done

for each job ; but if the nature of the work permits

several similar jobs to be put through each time

a machine is set the cost must be made a general

one and charged in the Oncost Rate.

Cost of Overtime. The extra payment made to employees

for working overtime often does not fall upon the work

which has necessitated the late hours, and for this

reason and for comparison purposes between similar jobs

the charging of overtime on one and not on another

occasions undesirable disparity. To avoid this the cost

of overtime may be regarded as an overhead expense

chargeable to the department where the work is done.

Waiting Time. Time of workmen while they are not
actually at work should be booked as a separate expense
charge. This may arise through jobs not being ready, or
material not being available, or cranes being employed, etc.
If this expense is booked under a separate expense number
against the department where it is incurred, the cost of
waiting time can be traced and may be considerably
reduced.

(2) OFFICE OR GENERAL EXPENSES. These are sub-
divided under Administration Expenses relating to general
business management, and Selling and Distribution
Expenses incurred in order to dispose of the finished
goods. They are a trading and not a manufacturing charge.



MULTIPLE COSTS EXPENSES 79

Items of Administration Expense include

General Management Salaries and Directors' Fees.

Office Salaries.

Stationery.

Postages and other expenses.

Rent, Rates and Insurance of Offices and depreciation

of office furniture.
Selling and Distribution Expenses include

Salesmen's salaries and commissions.

Advertising and printing of catalogues and price lists.

Agencies and branch office expenses.
Carriage to Customers. Carriage and cartage of raw

material is part of the cost price of the material, and

not an overhead expense.

Discounts and Bad Debts. Frequently, these two

items are not dealt with by means of oncost. Discount

is then an addition to the cost of each order ; and

bad debts are treated as losses chargeable against trading

profit.

Discounts or commissions' receivable are a source of
income usually treated as extraneous to manufacturing
and trading operations, but for simplicity these are fre-
quently deducted from administration expenses. Trade
discounts should be deducted from purchase invoices.

The question of interest is dealt with later. See page 100.

The need for the division between works and office
expenses arises in the first place because the two sets of
expenses are related to entirely different factors in the
handling of the goods, the works expenses being incurred on
each article in proportion to the effort put out in its manu-
facture, and the general expense being incurred on each
article in proportion to the difficulty of marketing it ; and
in the second place the manufacturing expenses are a
proper charge to include in a valuation of work in progress,
but the selling expenses can only be charged against sales
of finished goods and the general management expense is
usually similarly treated.



80 MANUAL OF COST ACCOUNTS

Expenses in Financial Accounts.

As already explained in the chapters dealing with
materials and wages, the Cost Office should dissect the
charges under those headings, so as to be able to obtain in
the financial accounts as complete an analysis as possible of
the expense incurred. In order to facilitate this a series
of standing orders or factory expense orders should be
prepared, each standing order defining a particular class of
expense and having a serial number. The workmen, in
booking time and obtaining stores, will then specify the
standing order number covering the expense item under
which the material or wages falls, and the analysis in the
Cost Office is facilitated. Thus, in respect of wages the
time sheets or job cards of each man when chargeable to
indirect expense will show

(1) Shop to which he is attached and man's number.

(2) Standing order number on which he is working.

(3) The department for which the work is being done.
For example, tool room mechanics repairing tools for

No. 15 department would book their time against number
15/18, when 18 represents the standing order number for
tool repairs. The figure 18 without a shop number would
indicate that the repairs are general and not for a specific
shop. Similarly, repairs to power house plant done in
25 shop would be booked to 10/14, 10 being the Power
House Department and 14 the standing order number for
repairs to plant. Similarly with material, the storekeeper
will insist before issue upon the identification in this manner
of the use of all material demanded. The expense standing
order number then indicates the expense classification
into which each item falls, and this is all that is required
for accounts purposes. The shop number will be wanted at
a later stage, in order to identify the charges with the
shops or departments to which they should be placed.

A periodical analysis of wages earned and stores issued
is compiled by the Cost Department and on this basis the
Accounts Office will journalize the transfers from Wages



MULTIPLE COSTS EXPENSES 81

and Stores Accounts respectively. At similar periods an
expense summary should be taken out from the financial
accounts which serves to focus the indirect charges and
should be used

(1) For criticism of current expenses in comparison
with a standard schedule laid down in advance.

(2) For comparison month by month with previous
summaries.

(3) For the purpose of securing control over the expense
charges in detail by the allocation of each charge over the
works departments responsible for incurring it ; a com-
parison being made from time to time of such departmental
charges.

A useful comparison may be made week by week from the
wages dissection of the ratio of direct or productive wages
to total wages, but as the indirect wages do not embrace,
by any means, the whole of the running expense, this
comparison does not entirely cover the field.

In place of numerical standing order numbers a series
of symbols is sometimes used, e.g. B. R. for Building
Repairs ; P. R. for Plant Repairs, and so on.

Periodical Comparisons.

In the preparation of periodical expense summaries on
these lines, the question presents itself of the period to be
adopted for the purpose. Seeing that wages are necessarily
dissected in weekly periods, whereas purchases, salaries
and trading results are most conveniently dealt with in
monthly periods, the practice is often used of having two
four-week months and a five-week month to each quarter.
This has the advantage that none of the periods is
sufficiently far away from the calendar month to disturb
the monthly charges, but the main purpose of the expense
comparison is destroyed because of the recurring five-
week wages periods. The logical method appears to be to
adopt a four-week month all the year round with 13 periods
to the year and this arrangement gives excellent results.



82



MANUAL OF COST ACCOUNTS



The following example of a monthly expense summary
indicates a useful method of tabulating charges. The
source of each expense in the books is indicated and serves
as a check upon the figures brought into account and a
useful indication of the type of the expense, e.g. in connec-
tion with repairs, the amount of purchases, stores material
used, and wages incurred should be shown against each
item. The fifth column will comprise special journal
entries, transfers from suspense accounts and other
exceptional charges.

MONTHLY EXPENSE SUMMARY WORKS EXPENSES.



T "'; . j. SSS. Wages.


Journa


! i


s.


d.


s.


d.


s.


d.


s.


d.


*


1. Foremen :


















Assistant do. . . .1


















Ratefixers . . .1






















Setters-up
2. Storekeepers


























3. Shop Clerks :




























Timekeepers




























Progress Clerks




























4. Crane Drivers




























5. Shop Labourers :




























Yard Labourers




























Transport do.




























6. Sundry Labour :




























Waiting and Learning .
7. Inspection ....




























8. Indirect Material




























9. Steam and Electric Power




























10. Heating ....




























11. Gas and Electric Light .




























12. Water ....




























Repairs to :




























13. Buildings




























14. Plant




























15. Transport and Rolling




























Stock .




























16. Machinery




























17. Patterns .




























18. Loose Tools and Utensils




























19. Jigs and Dies




























20. Rent and Rates .




























21. Insurance :




























Fire




























Health and Unemploy-




























ment ....




























Compensation




























22. Stationery ....
23. Salaries of Works and




























Technical Staff .




























24. Salaries of Works




























Clerical Staff .




























25. Experimental and Research
26. Canteen and Welfare




























27. Depreciation
28. Stores Adjustment





























MULTIPLE COSTS EXPENSES 83

MONTHLY EXPENSE SUMMARY GENERAL EXPENSES.



Office Rent and Rates
Heating and Lighting
Insurances .
Office Salaries .
Stationery .
Postages

Sundry Expenses
Depreciation
Travellers' Salaries

Commissions
Agency Expenses
Advertising
Catalogues, etc.
Discounts
Carriage
Bad Debts
Bank Interest .
Directors' Fees .



Total.



Pur-
chases.



s. d.



Salaries.
s - d



Petty
Cash.



s. d.



Journal.



Departmental Analysis of Works Expenses.

Assuming the total expenses of the month to be tabulated
in this manner, the next step is to allocate the works
expenses over the departments, because, according to the
information which can be obtained of the expense of run-
ning the different departments and the actual work which
necessitates the expense, the system of oncost to be used
for charging up expense to the work done will have to be
determined.

The nature of the work carried on will determine the
division into departments. The natural division of a
works into separate workshops may not be sufficient for
this purpose because more than one kind of work may be
carried on in each shop, and there should be a separate



84 MANUAL OF COST ACCOUNTS

department for each distinct class of work or process. The
following would be some of the typical departments in an
engineering works

Pattern Shop,

Foundry,

Heavy Machine Shops which may be divided into
Planing, Boring, Turning, etc.

Light Machine Shops similarly divided,

Tool Shop,

Erecting Shop,

Test Department,

Paint Shop. ,

The above would be operating departments charging up
labour to the work undertaken, and the total amount of
expense must ultimately be placed upon these shops and,
by means of oncost rates, upon the work which they do.

In addition to these operating departments the non-
productive or general service departments may include

Power House,

Transport,

Stores,

Building Service,

Hydraulic Power Service,

Compressed Air Service,

Welfare,

Management, and others.

Allocation of Works Expenses.

In order to obtain a basis for dividing the charges in
the financial accounts it will be necessary to obtain
statistical data according to the incidence of each expense.
A schedule setting out a natural method of division and a
number of typical expenses is shown on page 85 and in
the preparation of such a schedule care must be taken that
the original data are correct. The basis in the case of
heating, lighting, and building service will be a more or
less permanent division and a percentage of the monthly



MULTIPLE COSTS EXPENSES



85



total in accordance with the fixed scale will be charged to
each department. Where the basis of allocation is the
actual consumption, the records (or estimates if no actual
records are available) should be obtained at frequent
intervals. Where the allocation is based upon wages,

EXAMPLES OF SCALES FOR ALLOCATION OF WORKS EXPENSES
NOT DIRECTLY BOOKED TO SPECIFIC DEPARTMENTS.



Expense Service.


Basis of
Allocation.


Departments :


I.


2.


3.


4.


5.


6.


7.


8.


9.


10.


Steam or
Electric Power


Consumption
Return






















Heating


Volume of
Premises






















Gas


Consumption






















Electric Light


No. of lights






















Water


Consumption






















Hydraulic Power

























Compressed Air

























Building Service


Area or
Capacity of
Buildings






















1 Stores Service
























1 Transport Service
Office

Management


Total
Wages in
Operating
Departments






















Welfare
























Health and Unem- j
ployment Ins. J


Actual






















Compensation Ins.


M






















Depreciation


Value of
Plant























the actual wages of the period in question must be used ;
and in connection with depreciation the machinery and
plant schedules for each department should be frequently
revised. There will often be special circumstances modi-
fying a strict adherence to general rules, which are, of
necessity, only an approximation to the true position,
e.g. in the case of stores service, a department having a

1 See Note upon Warehousing Oncost Rate (p. 99).



86 MANUAL OF COST ACCOUNTS

departmental store of its own and carrying the whole of
that expense might fairly be relieved of part of its share
of the general stores service. Similarly, the cost of works
management salaries may not be a fair charge on all depart-
ments on a wages basis, as when one department requires
skilled technical advisers and another is of a different
nature and can be run with slight supervision, an
adjustment of the wages scale may fairly be called for.

When the basic scales have been prepared the first
step is to separate those departments which may be
termed General Services as distinct from Operating Shops,
and extract the allocation of expenses to be made to them.

This will entail not only the merging of some of the
expense items entirely in the General Services, but the
adjustment of the charges to be made by one General
Service to another, each department having still to be
regarded as bearing a fair share of each expense in which
it benefits, and various charges accrue to the General
Services in addition to the direct payments shown in the
financial accounts, e.g. Stores Department will be charged
with not only the storekeepers' wages, but with a share of
the rent and rates, etc. (coming under the head of Building
Service along with Building Repairs, Fire Insurance,
watchmen, and other allied expenses), also with Light and
Heat, Repairs, and any other charge incurred for it by
another department.

The Expense Charges will thus be grouped as directly
chargeable to specific shops or chargeable to certain
General Services which are to be allocated according to the
scales already drawn up.

The next step, after arriving at the amount of the
General Services charges, is to distribute these as shown on
the second schedule over the operating shops, along with
the directly booked expenses as indicated by the shop
numbers affixed to the standing order numbers on the
time sheets and material requisitions which have come
from the shops. By this means each of the operating



O O

M CO



a



t



>Q
-*0



i










88 MANUAL OF COST ACCOUNTS

departments is burdened with a fair share of the whole of
the factory running expense.

In the case of Tool Shops and Millwrights Departments,
it will be found a convenience to treat these as operating
shops, and apply an oncost rate to the wages incurred in
them against other departments for which the work has
been done. A certain amount of productive work will
also be done in these shops, and the departmental oncost
rate for this purpose is obtained from the ratio which the
department expense bears to the total of direct wages on
production orders plus wages on repairs, etc., for other


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