Copyright
Henry Julius Lunt.

Manual of cost accounts online

. (page 6 of 13)
Online LibraryHenry Julius LuntManual of cost accounts → online text (page 6 of 13)
Font size
QR-code for this ebook


shops. This adjustment is shown in the last item on the
distribution schedule where No. 3 department is credited
with an oncost recovery against the shops benefiting by
the work done.

It will be found that the departmental plan may be
applied in fixing an oncost rate for workmen engaged upon
outside repair work or erection of plant. A low rate of
oncost will be applicable ; for internal works expenses will
not fall on to their operations at all but only such items as
supervision, works office, works management.

At the foot of the distribution schedule is shown the
amount of direct wages in each department for the same
period and the number of hours comprised in these wages.

Departmental Oncost Allocation in the Financial
Accounts.

This allocation of works expenses to the departments
may be carried into a special section of the Nominal
Ledger by crediting Factory Expense Allocation Account
and debiting Department Accounts for each shop in respect
of the allocations made. The model on page 102 is a useful
form of ledger account to adopt for this purpose.

The amount of oncost chargeable to Work-in-Progress
Account will then be credited to such Department
Accounts. This will have the effect of showing the position
of each departmental oncost rate in the financial accounts.



!



1/5 o o tn o



1/5 o o tn o <c co o in CD eo i/5iftcr>



iftcr>



^88 2 8SS22SS



O O <fi ID O CO M OW5OIC
- C4i t^iN






^1/50 O'COWCO OODlfi lOOO0



ift O ft CO



iT)O - >ri



"



l 1 1 a

-rt^ cl ^ '* S fe3 ' -e-^ e

IllJlllilllllislilll



90 MANUAL OF COST ACCOUNTS

An alternative plan, which has many advantages, is to
maintain in the financial accounts the arrangement of
expenses shown in the periodical expense summary, so
that at the end of the year the total expense under each
head is obtained. The dissection, month by month, of
these expenses over the departments is recorded as a
statistical matter in the Cost Office by means of expense
schedules similar to those reproduced, and at the end of
the year the total amount of expense on each department
is obtained. The grand total of this will, of course, agree
with the grand total of the expenses shown in the expense
summaries, and by this means the same result is obtained as
will be ; produced if the monthly allocation to departments
were journalized but without quite so much complication.

Charging Works Expenses to Jobs.

The problem that presents itself now is to determine
the best method of ascertaining the proportion of works
expenses chargeable to each job, so that the charges shall
bear a close relation to the cost of the work performed in
each case. The following methods must be examined

ONCOST METHODS *

Flat Rate as Percentage of Direct Wages.

,, per hour of Direct Wages.
Separate Rates for Machine 1

Fitting J Labour.
Hand J

Warehousing Rate on Material.
Departmental Rates per hour of Direct Wages.

as Percentage of Direct Wages.

Machine Rates per hour of Direct
, Combining

Wages _ .

Machine Rates as % of Direct

. Rate.

Wages

Machine Rate per hour of Machine Time in conjunction
with a General Works Rate on Direct Wages.



MULTIPLE COSTS EXPENSES ' 91

RATES OF ONCOST

It will be observed that the model, (p. 89) gives an
average rate of

190 { 1 on Direct Wages

or 3s. 4d. per hour )

and Department Rates ranging between
315%



and 128/ c



or 6s. 8d. per hour



on Departmental
Direct Wages.



and 2s. per hour

(1) Percentage on Wages. One very general method of
charging factory expenses is by a percentage on the amount
of direct wages charged to each job. This has the advan-
tage of simplicity, but in most cases it is entirely unsound
because

(a) No adjustment is made for the equipment used by
different workpeople, as, for example, where in one depart-
ment a mechanic is using an expensive tool to shape a
heavy casting and in another department hand labour is
employed on light work.

In view of the fact that in an engineering works, for
example, different types of machinery will incur different
amounts of expense in the various departments in the
course of manufacture, it becomes important to know upon
which machines the greatest expense is being incurred.
Where a flat rate is used any two machines upon which a
given number of hours or a given amount of wages has been
expended, will be charged with the same amount of Oncost
or Works Expenses, whether the work has been done
mainly in an expensive department or in one in which there
is very little machinery and equipment.

(b) Even if the whole of the operations were of the same
type, the expense would not necessarily vary according
to the wages paid, because the wages of one employee and
another naturally vary for the same amount of work, so
that a flat rate of expense as a percentage of direct wages

7 (1765)



92 MANUAL OF COST ACCOUNTS

can only be correct if the work is entirely standard and the
wages at uniform rates. Where this is the case the under-
charge of expense in the heavy shops is balanced by the
overcharge in the light shops as the work goes through.
As it very rarely happens that the same proportion of time
is spent in each department on every product, so the
resulting oncost is bound to be incorrect in the majority
of cases. The amount of inaccuracy in the costs may
indeed be sufficiently substantial to more than counter-
balance the amount of profit obtainable on some of the
articles manufactured, and, in effect, although a flat rate of
oncost may be showing an apparently satisfactory profit
on all goods, the correct adjustment of the oncost would
show that without certain particular lines the trading
result as a whole would be considerably improved.

(2) Productive Hour Method. It is consequently
preferable to obtain the number of hours of direct labour
on each job by totalling the time recorded on the time
sheets in making up the wages abstracts, and, by dividing
the total productive hours into the factory expenses, a
charge on an hourly basis is obtained and Works Expenses
at this rate can be placed to each cost account for the number
of hours worked by the men on it. This is more correct
than a percentage of wages, because the factory expense
corresponds more closely with the number of hours worked
than with the amount of wages paid, and the irregularity
of oncost caused by unequal rates of pay is eliminated ;
but a flat rate on this principle still takes no account of the
equipment used. The result of the flat expense rate,
whether as a percentage or a rate per hour, is to overcharge
the jobs which are done by hand labour or with light
machinery and to undercharge those on which heavy
machines are used.

(3) Rates on Classes o) Labour. A simple plan to avoid
this result to some extent is to fix (a) a general rate for
hand labour based on works expenses without considering
expenses attributable to machines, (b) a higher rate for





,| t


#&


5

si


a


K

si




^1*


13^


g
si


s


CO


iii &




ii




s


a


. . . o N

5
P, * ^0


J


1 s5




5


5


o o o 4 -
tfi w co

O


O

H
W


i




1





8




1




a


a


W o d o
(/} 10 o o




-d


a


a


si


W *"* N *** .

a. 1-1


'


fr


a


a


si


H g jS ^o

f * ' ' S


s
1


i





i


1


K

B

o




1


o
si


o


a


W w
J Q odd
S 2 S ^ S




i


8

si






^r*; f i rC
< W 'V

X% - , |

W o <


<


CD


g






So, s o
HO P. .0
C/) 33 2 ^


CA)


1


I






H <; *

i =




ii
1


1






^" 5 8

IH


iL EXPENSE.


i


8

si


00

s


e
si


1


1


&



si


a


!


,.! 3

H M 3 5

9 D S 0>


,


o


1


1







H


i


S


J


a


| ' 1

1 = S 1






Q

A




i

a


co

Id



94



MANUAL OF COST ACCOUNTS



fitting shops allowing for the cost of tools, etc., and (c)
a heavier rate for machine shops. Where there is no
great diversity in the types of machines this plan is satis-
factory, and it may be applied in the form of percentages
on wages, or rates per hour ; the percentages plan being an
approximation from the rate per hour to endeavour to
obtain the same result without the elaboration required
to record the hours worked.

In extensive works a more elaborate plan is necessary.
An engineering works may be equipped with heavy machine
tools, requiring considerable space to operate, repairs,
power, and other running expenses in proportion ; as well
as other shops where the work may be entirely hand labour
engaged upon light metal articles ; and with many grades
of machine shops between these two extremes.

An example may be quoted, giving illustration of
total cost where different classes of labour are employed
on the same work.





Rate
Jour.


Time
Piece.


Wage
Cost.


Expense
at
200%.


Total
Cost.


Expense :
5s. hr.


Total
Cost.


Skilled . .
Semi-skilled .
Learner


s. d.
2
1 4
8


2 hrs.

2*


s. d.
4 -
3 8
3 4


s. d.
8 -
7 4
6 8


s. d.
12 -
11 -
10 -


s. d.
10 -
13 9
25 -


s. d.
14 -
17 5
28 4



The items shown in the comparison (p. 93) are representa-
tive orders, and under each method the total expense
charged comes to approximately the same amount ; but
owing to the different systems of apportionment, serious
differences arise.

Order No. 1 shows an expense charge of 120 on the
General Percentage basis ; on the General Hour basis,
102 12s. 4d. ; corrected on the Departmental basis to 134.

Order No. 2, on the General Expense basis, has an
expense cost of 72-76 ; corrected on the Departmental
basis to 51-53.

Order No. 3 has a reduced cost also on the Departmental
plan 176 on the hour method against 181.



MULTIPLE COSTS EXPENSES 95

Departmental Rates.

It is frequently found sufficiently accurate for practical
purposes to group the operations of a factory into depart-
ments, each department comprising a group of similar
machines, or a single machine, or a set of operations. For
each such department a separate oncost rate must be fixed,
either as a rate per hour of operation of the different
machines, or a percentage upon the wages incurred. For
the sake of simplicity in the Cost Accounts the percentage
method is frequently adopted, but this has the disadvantage
that the oncost charge will fluctuate with the rate of wages
paid, whereas it should only be affected by the number of
hours worked e.g. in the case of two men operating
similar machines, one earning a high rate of bonus as a
piece worker, and the other not being so skilful, the amount
of oncost charged in respect of the two machines should
be the same for the hours worked, but in the case of the
piece worker earning a heavy bonus if the percentage rate
is used a heavier oncost charge will be obtained.

A " Department " for this purpose will consist of a shop
where a specific process or variety of work is carried on ;
or a group of similar machines forming part of a machine
shop containing several such " departments." The essential
plan is that each separate kind of work must form a depart-
ment to itself. The works expenses are then allocated
to the departments, and a rate is fixed for each department
based on the direct or productive wages paid in it, either as
a percentage or a rate per hour. Within each depart-
ment an average rate of working is obtained so that
approximately normal results of working are constantly
secured.

The features of the departmental oncost system are

(1) Department rates of oncost.

(2) Allocation of Works Expense to the departments
either monthly or yearly.

(3) Comparison of Department Expenses with oncost
recovered and consequent revision of oncost rates.



96 MANUAL OF COST ACCOUNTS

It is advisable that a monthly allocation should be made
of the works charges so that the expense being incurred
by each department can be ascertained and controlled.
A schedule or budget should be prepared in advance ;
and comparisons should be made against this standard as
well as against the amount of oncost chargeable on the work
done in the shop. Alterations of oncost rates should only
be made at longer intervals sometimes yearly to obtain
permanence wherever possible and to avoid changes in
estimating for contracts.

Machine Rates.

A further development in the accurate recording of
working cost is to endeavour to ascertain the expense of
running each machine, in order to be able to charge the
work done on the machines with the actual expense due
to such work being performed. The first step is to ascer-
tain the correct departmental rates and these must be
subdivided in turn. Instead of treating each machine
separately, which might result in an excessive number of
almost similar rates, it is usually preferable to treat them in
groups and fix a rate for each group. The machine rate
may be arranged to include the whole of the works expense
upon the basis of the number of hours the machine will
work, or it may be arranged in conjunction with a general
works rate which provides for the general expense of the
factory, and the machine rate will then cover only the
expense directly associated with the machine. The latter
method has the advantage, perhaps, of obtaining the
closest degree of approximation that can be expected to
the actual expenses incurred on each job, but this
plan, while apparently sound, has the following weak
points

(a) It is impracticable to allocate with accuracy the
works expenses over all the machines separately, on account
of the irregularity in running time.

(b) Even if the above allocation is attempted it is



MULTIPLE COSTS EXPENSES 97

impossible to estimate the time that each machine will
run during any future period.

(c) In consequence no correspondence between expense
of running and oncost earned by each machine can be
maintained.

(d) t^rom the point of view of application in practice
the use of a multiplicity of rates leads to inaccuracy in
costing.

The particular items of shop expenses which are covered
by-

(a) Productive hour rate applicable to all wages,

(b) Machine hour rate applicable only to machine time,
may vary in different cases, but the general principle to
be worked upon is to include in the machine rate all those
expenses which are necessarily associated with the pro-
vision of the machines and to base upon the productive
hour rate all those general charges which would remain
if the machines were discarded.

Unless these charges are very carefully handled, and the
detail work in connection with the compilation of the
oncost records is accurately carried out, the results are
apt to be more inaccurate than is likely to arise with
departmental systems. This is a serious drawback in
practice and on this account the method has been
frequently found unsatisfactory.

For the fixing of machine rates more detailed analysis
of the works expenses is required, in fact, each department
must be split up so as to obtain an allocation of its expenses
over the machines, treating each machine in all respects
as the departments were treated in dividing up the total
works expenses. In this way we may obtain individual
expense charges for each machine and, allowing for the
average running hours, an hourly rate can be fixed.

The items needed are

(1) Building Service Expense for space occupied with
cost of heating and lighting.

(2) Power.



98



MANUAL OF COST ACCOUNTS



(3) Repairs and sundry supplies including tools, oil,
etc.

(4) Charge for Capital Outlay consisting of depreciation
and interest on outlay.

In determining the first, regard must be had to the
space occupied by the machine and its surroundings.

The second will be ascertained from the records of power
consumed and the requirements and running hours of
machines in the shop.

The third will be arrived at in detail in every case in
accordance with amount to be written off the particular
machine, and may be varied from time to time, especially
if additions are made.

General Works Rate may be included in the machine
rate, or it may be necessary to divide this charge between
machine labour and hand labour when both are at work
in the same shop.

EXAMPLE OF MACHINE RATE.
COMPARISON OF COST or PRODUCTION ON Two MACHINES.





MACHINE " A."


Cost per
annum.


MACHINE " B."


Cost per
annum.


Rental Cost


Floor space occupied
say 400 ft. at Is. .


20


say^300 ft. at Is. .


15


Power . .


50 weeks of 48 hours,
less 15% idle time,
estimate


200


Estimate . . .


50


Repairs .


Estimated to average


c


Estimate .


10


Capital Outlay .


Cost, 1,000
5% Interest . . .
18% Depreciation to
reduce value to
100 in 5 years


50
180


Cost, 500

6% Depreciation to
reduce value to
200 in 10 years .


25
30


Works Rate


Is. per hour . .


102


Is. per hour . .


102




Cost per annum
Cost per running
hour (2,040 hrs. per
annum)
or
Wage cost per hour,
say


602

295
70-7d.

37- d.


Cost per annum

Cost per running hr.
or

Wage cost per hour


232

113

27-17d.
24- d.


107-7d.


5M7d.



Capacity, or Output in units of standard

work

Cost per unit



30 units Output
3-59d. Cost per unit



10 units
5-1 17d.



MULTIPLE COSTS EXPENSES 99

From this it will be seen that Machine " A " will produce
more cheaply than Machine " B," assuming that it can be
kept occupied so as to attain the benefit from its extra
capacity.

In a shop having already a shop rate, where it is
desired to fix a rate specially for one machine or group of
machines, a plan readily adopted is to eliminate the
items (2), (3) and (4) above from the shop rate, and
add the exact amounts applicable to the machines in each
case.

In some works it is preferred to use the machine rate for
machine charges only, in addition to a general works rate
applicable to all direct labour on a percentage basis ; and
the application of the example given (A) would then be a
machine rate of 4s. 6d. per hour for the number of hours
of the machine time, which would be separately recorded
on the job notes of the men working it, together with an
oncost rate on direct wages of say 50 per cent.

In the event of a departmental plan being adopted
the amount of oncost in each department will be obtained
from the direct wages each week as soon as the wages
analysis is complete, and this amount compared month
by month with the allocation of expenses will indicate
whether each department is meeting its share of the
burden.

The value of the Departmental Expense Allocation
method still remains in a machine rate system, because the
department oncost (whether wholly on wages or hours,
or partly on wages and partly on machine time) in each
department will show whether the rates are adequate
or if any department is failing to earn the charges
upon it.

Warehousing Oncost.

A difficult point arises in the correct allocation of charges
incidental to the buying of material, handling and trans-
portation of same to the operating departments. All



100 MANUAL OF COST ACCOUNTS

these charges may be dealt with under the heading of
Stores and Transport Services, and the plan sometimes
adopted is to allocate stores service charges to the jobs
on the basis of material used. It cannot be said, however,
that the expense incurred on different materials will vary
directly with their value or their weight, and on this
account the plan is frequently preferred of merging the
stores charges in the general works oncost. Approximately,
however, the correct stores service charges can be obtained
as a percentage on the value of materials, if the materials
are grouped in a series of classes, and a separate ware-
housing rate fixed for each class. It then becomes impor-
tant to observe that the amount of warehousing rate
charged to the jobs on this basis will suffice to cover the
stores expenses referred to.

Interest.

There are many divergent views among cost accountants
as to the method of treating interest in obtaining correct
costs of production. It is argued that interest is profit
and should be disregarded entirely in arriving at the costs ;
and in businesses where there is little expensive plant,
and departmental rates or machine rates are not required,
this may be the simplest course to take ; and this practice
is usual and has the advantage of bringing out the costs
upon a basis clear of standing interest and dividend charges
which from a costing point of view are closely allied. At
the same time a sound objection can be urged in cases
where machine rating is used, because the comparative
cost of operating two machines is not correctly obtained
unless the cost of the capital locked up in each is taken into
account. In concerns where large sums are laid out in
equipment, and especially where the results of operation of
different plants in the factories are to be compared, it is
obvious that the cost of providing the equipment should
be taken into account in making the comparisons and
fixing the differential rates. From this point of view it



MULTIPLE COSTS EXPENSES 101

must be borne in mind that the accountant is concerned
with interest on money laid out, charged at a fair market
rate upon the amount of the permanent outlay in the
shops and departments, and it is immaterial whether the
business has to provide interest on debentures, mortgages,
loans, or in any other form whatever.

Where it is found desirable to take this circumstance
into account, as particularly arises in the case of a company
operating a number of factories, the charges may usefully
be arranged under two heads

(1) RENT covering an equitable charge for the use of
buildings which are owned.

(2) INTEREST ON PLANT covering a market rate of
nterest on outlay which will be allocated over departments
and machines.

The amounts to be charged under these heads should
be included in the monthly expense summary and will
form a credit to Interest Account against Standing Interest
Charges.

An alternative method is the proportionate reduction
of all rates equal to the amount of the interest included in
fixing them.

In this connection it should, however, be noted that for
the purpose of valuation of work-in-progress the interest
included in the oncost rates cannot fairly be capitalized
and must therefore be written back by making a reserve
for the estimated amount.

The same procedure will naturally be required where the
works expenses in any period have amounted to less than
the total of oncost charged to the Cost Accounts.

Patterns, Tools, etc., are dealt with in chapter XI, page 109.

Expenses should be charged on (1) Sales Orders and
Sales Repair Orders ; (2) Stock Orders for parts, etc., for
stores ; (3) Plant extensions and Capital Expenditure
(except when small in amount) ; but not on Works
Repair Orders, Tools, or similar jobs which are themselves
expenses.



o -oiooomoo
TI ir>c<ieNiMc<|i.o



^-tNW^lft

d .



MULTIPLE COSTS EXPENSES



103



An example of a Department Oncost Account would
appear as follows

No. 9. SHOP EXPENSE ACCOUNT.

















Jan. 31


To Total Sundry Expenses,
chargeable to Shop, in-
cluding General Works




Jan. 31


By Machine Hours (say)
2,200 @ 5/- 550
400 @ H- 140






Rate ....


987




300 @ 10/- 150












.


840










Shop Rate on Hand












Labour, say, 380












Hours @ 3/- .


57










Balance equal to 6d.












per hour chargeable












on 3,280 Wage Hours












or transferable to












Oncost Adjustment












Account


90













..!. -






987






987



The balance of this account arises either through

(1) The shop expenses having exceeded the estimated
amount or

(2) Idle time reducing the number of operating hours.
In the first case it may be necessary to increase the

rates ; in the second case regard must be had to the
probability of improvement.

The oncost balances resulting when making up final
accounts for an annual Balance Sheet should be transferred
to the Manufacturing Account, as they reveal a profit or
loss as the case may be. If an oncost reserve is desired
a credit balance may be carried forward for this purpose.

In addition to revealing the amount of the shop charges
not absorbed by the machines, the totals of machine time
also serve for the record of idle machine time, whether
caused by slackness of trade or machines being out of
repair.

The Idle Time record is necessary in judging the cost of
one machine or method against another and may be usefully


1 2 3 4 6 8 9 10 11 12 13

Online LibraryHenry Julius LuntManual of cost accounts → online text (page 6 of 13)