Part 12

=37. Charts.= While the value of chart records is generally admitted, there will probably be no one in the plant who will appreciate this form of presenting figures more than the manager, who, from his mechanical training, will at once grasp the situation as thus presented. The general trend of operations for the whole period is immediately revealed at a mere glance, without any systematic study of the figures involved, and any unusual condition is detected at once.

To show the possibilities of thus arranging comparative statements, two charts, Figs. 7 and 8, are presented, on which are plotted the same results appearing on the tabulated statements already shown, or previously used for the purpose of illustration on Pages 31 and 34.

On one chart is shown the total pay─rolls with split─up of same into productive and non─productive labor, with the percentage of each on the total; the other shows the total expense, also subdivided into shop and general expense, with the resulting percentages of same on the productive labor as shown on the first chart.

=38. In Conclusion.= While there is no end to the number of statements that can be prepared and that can be elaborated almost indefinitely, it is well to continually bear in mind that the statement which best serves its purpose is the one which conveys the most information in the fewest figures; is not overloaded with unnecessary detail; whose tabulated data is well chosen, and whose make─up is sufficiently attractive to cause it to be read and studied, and not thrown into the waste basket.

COST SUMMARIES

=39.= Any system of cost records is deficient that does not provide for the tabulation of all items entering into the cost of individual units or jobs, in such form as will permit of the computation of the total of such costs for comparison with records of total manufacturing expenditures. Three elements enter into the cost of the finished product──_material_, _labor_, and _expense_.

Under the head of material is included the cost of materials of all kinds of which the product is made.

Labor is of two classes, _direct_ and _indirect_. Direct labor is that which is applied directly to the manufacture of a given article; indirect labor is that which, while necessary to the operation of a shop or factory, is not applied to specific jobs or the production of individual units. In a manufacturing industry operating a machine shop, the labor of machine operators would be classed as _direct_, while the labor of porters, oilers, and general workers employed in the shop would be classed as _indirect_. The superintendent of the plant, shop foreman, factory clerks, engineers, firemen, and general workers also belong in the indirect classification. For accounting purposes, indirect labor is divided into two classes──shop indirect and general indirect. Shop foremen and general workers employed exclusively in the operation of a single shop are properly classified as _shop indirect_, and their wages are charged against the operation of the shop. The superintendent, factory clerks, and general workers necessary to the operation of the plant, whose time cannot be charged against the operation of any one shop or department, are classified as _general indirect_.

Expense includes all items entering into the cost of the product or the operation of the plant, that are not included in the charge for material and labor. Expense, like labor, is properly divided into _shop expense_ and _general expense_. General expense includes the cost of all supplies and miscellaneous items of expense incurred in the operation of the plant, which cannot be charged to individual shops. Such items as heat, light, building maintenance, taxes, insurance, and depreciation belong in the classification of general expense.

Any classification of expense items that is not made with reference to a specific plant, must be general; items that in one plant must be classed as general expense, are applied in others as shop expense. The item of power costs furnishes an example. In a plant equipped according to modern engineering ideas, with electrical transmission of power and each machine equipped with its own motor, an exact distribution of power costs to individual shops is a simple problem. The total cost of power for a month is divided among the several shops in proportion to the amount used by each, as shown by meters. Even the hourly cost of power for each machine can then be determined. With a shaft─and belt─driven plant the problem of distributing power costs is less simple. When power costs can be distributed accurately to departments, however, it should be done; otherwise such departments as the drafting room will be charged for power when none is used.

COLLECTING COST DATA

=40.= For the purpose of making the necessary summaries, complete details of all items of cost for each operation must be collected. This data supplies the foundation for all tabulations of cost statistics.

The first step necessary to insure a record of the cost of manufacture of a given article is the entering of a production order, followed by the necessary shop orders, and the orders of the foremen to the workers. The details of these orders are fully described in another section.

When a foreman receives a shop order, his first duty is to ascertain what material will be needed. He then orders this material from the storeroom, using a requisition as described in the discussion of systems for the stores department.

On receipt of the material the quantity is checked against the foreman's copy of the requisition, which is then sent to the cost department. In the storeroom, the necessary entries are made on the stores records, after which the requisition is sent to the cost department.

When the foreman is ready to assign the work, he issues work orders to his men. As explained in the discussion of labor records, the usual form for work orders is a time─card. On completion of each job, the men deposit the time─cards in the rack provided for that purpose. These are later sent to the cost department.

In actual practice, it is usually best to have all requisitions and time─cards collected once during each day by a messenger from the cost department. Sometimes, the cards are also filled out in the cost department and delivered to the foreman with his shop order, leaving him to enter only the man's number. When this plan is followed, the cost clerk must be familiar with all of the operations required, and must keep the foreman supplied with work orders to keep the shop employed for at least a day ahead.

The receipt of the requisitions and time─cards supplies the cost department with the necessary data for material and direct labor charges to individual jobs. Data for similar charges on account of repairs is secured in the same way.

The character of the records compiled from this data determines the real value of the entire system of cost accounting. If, as is so often the case, the compiling extends no farther than a mere tabulation of costs of individual jobs, it does not reach its full value as a part of the accounting records. Like single─entry bookkeeping, such records are no more than mere memoranda. The full value is reached only when the records of the cost department are made a part of the general accounting system of the business; where controlling accounts absorb all individual items of cost.

=41. Material Costs.= The compilation of material costs from the requisitions should exhibit the total cost of all material used in the plant and the total cost of material used on each job.

The records intended to exhibit the cost of _all_ material issued to the factory should be divided according to classes, following the same classifications as used for material purchase accounts in the general ledger. This is very important as the information secured from such classifications is needed to form the connecting link between the cost and general accounting systems.

The value of the accounting records is greatly enhanced if, in the general ledger, a purchase account is kept for each class of material and supplies. If but one kind of material is used, only one material purchase account is needed, but in a furniture business, for instance, separate accounts should be kept for purchases of lumber and hardware; in a harness manufacturing business, accounts should be kept for harness leather, patent leather, saddle leather, and hardware. The proper classification for any special business will readily suggest itself, but the material should be classified according to its most natural divisions.

The stores records also should be divided according to the same classifications, so that the records of material included in any one purchase account can be checked, without reference to the records of other classes. In the storeroom of a harness business, a card or sheet would be used for the record of each item in the hardware stock, while all of these individual records would be filed under the general classification, _hardware_.

This method provides three records, each closely related to the others. In the general ledger, there is a _hardware purchase_ account; in the storeroom, a detailed record of the hardware stock; in the cost department, a record of all hardware issued to the factory. When the cost department record is brought into the _hardware purchase_ account, by a credit through the journal, the balance of this account should show the value of the hardware stock and should agree with the records of the stores department.

The compilation of supplies costs should be made along similar lines, and the same care should be used in the classifications. Fuel purchases, for instance, should be kept in a separate account, while general factory supplies──as oil, belting, waste, etc.──may be kept in one account or subdivided, depending on the size and nature of the business.

=42. Material Cost Reports.= The material records of the cost department relating to totals issued should be made in the form of reports, as they will be required in the general accounting office. These reports need not show order numbers, but should show whether used on production, construction, or repair work. The supplies record should show by what department the supplies are used.

Fig. 9 shows a form for a report of material costs. In the heading is given the class of material, being the caption of the purchase account in the general ledger, and the month for which the report is made. The body of the report provides for a daily record of amounts charged to production, repairs, and construction, with an extra column for any special classification that may be needed at any time.

This form is in duplicate, the original being printed on light weight paper to insure perfect carbon copies. A loose─leaf form is most satisfactory because both copies, with carbon paper between, can be kept in a binder and the entries made each day.

[Illustration: Fig. 9. Monthly Statement of Material Issued]

Duplicate sheets are used for each material classification. Each day, the amounts are extended on all requisitions. The requisitions are then sorted according to material classifications, those applying to production, repair, and construction orders being kept separate. Those of each subdivision are footed, preferably on an adding machine, and the total is then entered on the report.

For sorting requisitions, a box or rack, with compartments for the divisions in each class, is most convenient. Such a rack is shown in Fig. 10.

Reports of supplies issued to the factory are handled in the same manner as materials. The form used for this purpose and shown in Fig. 11, is similar to the material report form, the only difference being that amounts are distributed to the several departments.

At the end of each month, the report forms for material and supplies are footed, the original is sent to the general accounting office, and the duplicate is left in the binder in the cost department. When the cost accounting is handled in the general accounting office, it is not necessary to make these reports in duplicate; this is necessary only when the offices are separated.

[Illustration: Fig. 10. Rack Used for Sorting Requisitions]

=43. Labor Costs.= From the time─cards or work orders, labor costs are compiled both for separate jobs and to show totals by departments and for the entire plant. The compilation showing totals is made for the purpose of checking the pay─roll──to prove that all labor paid for has been charged to factory operations in some form.

The time─cards should first be sorted according to departments, then re─sorted to separate the direct production, indirect production, repair, and construction labor of each department or shop. The cards representing the different classes should be footed on an adding machine, and the department totals compared with the pay─roll records. Daily comparisons should be the positive rule in order that discrepancies may be adjusted while the matter is fresh. On no account should the adjustment of discrepancies be omitted──labor reports from the factory _must_ agree with the pay─roll. Cards showing the class of work done must be turned in for _every_ man.

The tabulation of labor costs is really made for the purpose of distribution; that labor charges may be distributed to the proper accounts. The nature of the tabulation will, therefore, depend largely on the class of business for which it is to be used. In some lines, costs must be distributed by both departments and classes of labor; in others, by classes of labor only; sometimes, by classes of product──though this will usually be covered in the departmental distribution.

A form intended for the distribution of labor costs in a single department is shown in Fig. 12. This form is in loose leaf and is filed in a binder, the sheets being arranged in numerical or alphabetical order representing the departments. If the cost and general accounting departments are separated, this form should be in duplicate; otherwise, one copy is sufficient.

In the body of the form, distribution columns are provided for the different classes of labor──direct, indirect, repair, and construction, with a column for any special classification that may be needed.

[Illustration: Fig. 11. Monthly Statement of Supplies Issued]

After comparison with the pay─roll record, the total labor costs are entered daily on this form. At the end of the month, the sheets are footed and originals sent to the general accounting office.

=44. Job Costs.= When they have served their purpose in compiling total material and labor costs, the material requisitions and time─cards are sorted by job numbers, direct and indirect, repair and construction cards being kept separate. Where operation costs are desired, the time─cards for direct labor on each order or job number are re─sorted by operation numbers. Totals of material costs for each job, and totals of direct labor costs for each operation and job are obtained, these amounts being the basis on which charges to jobs for the day are made.

[Illustration: Fig. 12. Departmental Labor Distribution Sheet]

The totals of each class, obtained from requisitions and time─cards, must agree with the totals of corresponding classifications on the monthly tabulation of material and labor costs, as in Figs. 9 and 12. Totals of material and direct labor for jobs and operations are next entered on job or operation records, or both. As a rule, it is best to arrange job records so that material and labor costs can be entered daily, no matter how much time is required to finish the job.

Fig. 13 shows a form designed for the assembling of material and labor costs for a single shop or department. For the labor distribution, as many columns as necessary are provided for the record of costs by operations. In the material column, the kind of material is entered and the amount extended. When the manufacture requires operations in several shops, one of these forms is used for each shop on each production order──that is, a form for each separate shop order. When the job is finished, the costs for all shops are assembled on one form to obtain the total cost of the job.

[Illustration: Fig. 13. Recapitulation of Departmental Labor and Material Costs]

The total material and direct labor costs are brought down on this form, but indirect labor and shop expense are added as a percentage, as has been described in the discussion of expense distribution. General indirect labor and general expense is added to the combined total of all shop costs. In this connection it may be well to emphasize the importance of distributing every expense possible to individual shops, leaving only those items that cannot be so distributed to be added as general expense. For the ostensible purpose of reducing labor, it is the practice of some accountants to throw all expense items into one class, adding the whole as general expense. This is not to be commended, as it results in an unequal distribution. In one shop, the ratio of indirect labor, or of the cost of supplies, to direct labor, may be much higher than in another; the expense for oil, belt lace, waste, etc., is heavy in the machine shop──nothing in the assembling shop. Adding all expense under one head, means that the same per cent is added to direct labor costs in all shops to cover these items; plainly, an unfair charge.

[Illustration: Fig. 14. Boston Ledger Form Adopted for a Continuous Cost Record]

A further reason for distributing expense to shops is, that costs of separate operations are more accurately figured. To reach their greatest value, cost records should reduce costs to the smallest possible unit. Every detail should be shown, and these records should be available for comparison.

Fig. 14 shows how the Boston ledger may be used for a continuous cost record. The regular form is used, five lines being set aside for each job. The first line is for the job number, following which, material, direct labor, indirect labor, and expense are entered. Under each date, the first column contains particulars of previous costs, the second, the costs added for the day, and the third column contains the totals to date. It is not necessary to use the column for previous costs except the first day for which the page is used; daily costs can be added to totals for the previous day.

Several jobs can be recorded on one page and the record can continue until a job is finished. Additions can be made daily, weekly, or even monthly. This form is used to excellent advantage for contracts that cover a long period.

When a large number of small jobs are going through the factory at all times, the labor of the cost department can be reduced and, as a rule, satisfactory results secured, if tabulations of job costs are made when the job is finished. This should not be allowed to interfere with the daily tabulation of total costs, but when requisitions and time─cards have been re─sorted by job numbers, they may be filed by these numbers, in a job rack──new cards being added from day to day until the job is finished. Tabulations can then be made of material costs, showing the quantity and cost of each kind used, and of the labor costs, showing costs by operations or by order numbers.

Each business requires its special form for job cost records. The form must provide for the information of greatest importance to the business in which it is used. The forms shown herein are submitted as examples for their suggestive value.

[Illustration: Fig. 15. Recapitulation of Costs for a Single Job]

Fig. 15 shows a form adapted to many lines. This form is intended for a record of the cost of parts, but could be used for assembled machine costs. Provision is made for detailed labor costs by man, numbers, and kind of work. It will be noted that, after obtaining the actual manufacturing cost──material, labor, and factory burden──profits are added. In our opinion, profits have no place in cost records. To establish a selling price, it is legitimate to add a factory or manufacturing profit before adding a percentage to cover sales expense and a selling profit, but the addition of these percentages has no bearing on the actual manufacturing cost.

Fig. 16 is a representative form for a machine shop. All operations and materials are listed by name, totals only being recorded. Factory expense is added to the labor cost, while a percentage to cover loss and waste is added to material costs. This form is subject to the criticism that all expense is added as one item──no provision is made for segregating the expense of each shop.

The form shown in Fig. 17 is adapted to a small shop, or for repair jobs. This is the most simple form that could be devised; columns are provided for all essential information, and all items are to be written in.

[Illustration: Fig. 16. Cost Summary for Use of a Machine Shop]

=45. Comparative Cost Records.= The chief value of cost statistics lies in the opportunity offered for comparison. The fact that the last lot of part No. 10 cost $1.17 each, does not, of itself, indicate that the cost is either low or excessive; but if our records show that two previous lots have cost $1.20 and $1.21 each, the comparison reveals the fact that the cost is low.

Valuable as this comparison is, it would be still more valuable if it showed _why_ the cost is less. Suppose labor and material costs are segregated. Comparison shows that the reduction of three cents is made up of one cent material and two cents labor. Now if the quantity and cost of each kind of material used, and the time and cost of each operation are segregated, an analysis will show the exact operations on which the saving has been made. It will be found, perhaps, that the cost of operation No. 10 was actually decreased three cents, but that the cost of No. 16 increased one cent. Why these variations? Was some unusually favorable condition responsible for the saving on No. 10, or can the new cost be maintained? Can the cost of No. 16 be brought back to the former figure?──these are the questions to be answered by the production engineer. The records of the accountant supply him with the means of comparison──point out both saving and waste. Profiting by the information, the engineer devises ways of approaching more closely to maximum standards of efficiency.

[Illustration: Fig. 17. Cost Summary for Small Shops and Repair Jobs]

Comparative records should, therefore, provide for a comparison of every item entering into manufacturing cost. Comparisons should be based on standard units; if two jobs are to be compared, they must be identical or the comparison is of no particular value. The modern method of manufacturing standard parts makes comparison of practical value. Savings and wastes are more readily located in the manufacture of parts, than in building a complete machine.

[Illustration: Fig. 18. A Comparison of Labor Costs]

[Illustration: Fig. 19. A Comparative Record of Material Costs]

Excellent examples of comparative records are shown in Figs. 18 and 19. Fig. 18 provides a detailed comparative record of labor costs, the costs of seven jobs being recorded on each sheet. This shows, for each operation, the number of pieces, hours, amount, average labor cost, and average time consumed. If on three orders, 2,000, 3,000 and 5,000 parts are made, this record will show the total cost of each order, the cost of each part, and by comparison, the relative cost when manufactured in different quantities.

[Illustration: Fig. 20. Monthly Comparison of Costs of Standing or Expense Orders]