Business costs

Front matter

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LP9-P11G U.B.C. LIBRARY ue-.uuiuorbti'u uf Em K sit vToUnnhm

Preface

Those who have rejoiced at the rapidity with which business has taken its place among the professions have recently had occasion to point with pride to the growing body of scientific business literature. Books, periodicals, pamphlets, and special articles in great number, dealing with every aspect of complex modern business, come from the presses every month. Xot only is the mass of this literature increasing in a most gratifying manner, but its quality is improving. The writers are no longer amateurs venturing vague suggestions; they are authorities expressing themselves with precision and dealing with difficult matters in competent, professional style. During the last twentv years colleges and universities have trained more and more young men to bring scholarship and the scientific spirit to business'. These students have justified their training; they have had a profound and beneficial influence upon industry. By their labors in the business house, in the professorial chair, and in the author's study they have shaped the ideals of the world of work, and they have created a new body of knowledge for that world — a body of ideas expressed in acceptable terminology, organized according to demonstrable principles, and proved in processes of tried

technique.

One of the first aspects of business to be brought within fairly generallv accepted bounds of scientific agreement was accounting. The Certified Public Accountants and the colleges that trained them were largely responsible. The accountants with their background of schooling considered themselves a professional group with professional standards to maintain; consequently they solidified, protected, and developed the science of accounts. But gradually the executive who had employed bookkeepers, accountants, and auditors to discharge what he considered rather colorless functions of recording began to take a more personal interest in accounting because he came to realize that he had to depend upon the operation of his accounting system for information essential to the effective convi PREFACE

duct of his business. From interest in the accurate analysis of the results of transactions he passed to inquiry into causes. This soon involved him in the mysteries of business costs. It is in the special field of costs that business methods and accounting systems come together most intimately. For this reason many excellent books and articles have been written on cost accounting, from the standpoint of the general manager who had to be made acquainted with the uses of this " business stethoscope," and also from the standpoint of the accounting expert on costs who has to keep in touch with all new devices and methods to insure greater refinement, reliability, and speed in cost calculations. At first most of the works on cost accounting dealt with factory costs for manufacturing plants of the job-order variety, but gradually attention was paid to other kinds of enterprises until a great mass of permanent and fugitive literature was produced that covered almost every conceivable phase of costing. Nevertheless, there has been hitherto no single, authoritative treatise to cover all the principles of cost accounting for extractive, manufacturing, and mercantile industries with plants of either the continuous-process or the job-order type, and to present methods whereby all the books of the firm could be kept interlocked with a practical cost system in harmony with proved principles.

To meet this need for a comprehensive manual of cost accounting I requested Professor Eggleston of the staff of the College of the City of New York to prepare the material for a text that would be serviceable alike to students and to men already in business as executives or as accountants. It would be difficult to find a person better qualified for the undertaking. Educated as an engineer, Professor Eggleston was able to understand the mechanical processes of production, and as a Certified Public Accountant he was competent to analyze the financial books of any concern. Thoroughly prepared in these two essential branches of knowledge, he spent a number of years as an expert for the United States Tariff Commission, examining the production plants and books of a great many concerns in various lines of industry in order to report on the details of costs that might affect tariff legislation. This experience was subsequently amplified by extensive work as a cost consultant in private practice. Entering upon his task thus well prepared, Pro-

PREFACE vii

fessor Eggleston gathered together with characteristic thoroughness all the literature on the subject of cost accounting. As a consequence, this work, which is the result of his efforts, may be considered to be a digest of all available literature on costs in the English language.

But besides gathering together all that had been said on all aspects of cost accounting, Professor Eggleston added contributions that grew out of his own experience and thought. For over three years he worked over this material with his classes in cost accounting at the College of the City of New York, gradually sifting out those illustrations which seemed to be of most service in impressing principles upon students. It has been to me a great pleasure to work with Professor Eggleston in the organization of the wealth of material that he gathered together and selected for his text. As collaborator with him, I must say that he is the author of all the technical material in the book ; my services have been confined to matters of exposition, presentation, and organization, and also to an attempt to standardize terminology and to bring the theory of cost accounting into harmony with accepted general principles of economics. This latter object was kept in mind because I have long felt that economists should adopt terms understandable to the business man, and writers on practical business subjects should formulate their principles so as to make clear their relationship to broad economic principles.

It will be observed that considerable care has been taken to present in Part I a fairly comprehensive view of the aims of cost accounting. Each business establishment is looked upon as a business economy with internal problems of organization and with external relationships to the market from which it buys material and services and to which it sells its product. The cost system is regarded as a necessary piece of administrative machinery to enable " the enterpriser to combine the various factors of production in the most advantageous proportions and relationships and to adjust his output to the market so that there will accrue to his business a maximum net return." In Part I, a comprehensive view of the elements of cost, including the general cost formula, is given, the relationship of cost to production is outlined, and a general system of interlocking the cost accounts with the financial books of the firm is set forth.

viii PREFACE

We have felt it wise to give this comprehensive view of the nature and functions of cost accounting at the outset and then to * devote the rest of the book to an orderly and exhaustive presentation of all the details of device and practice that would be met in any situation confronting the cost accountant in any line of business. Besides presenting all the discoverable underlying principles of cost accounting, we have been careful to present a wealth of illustrations and forms of value to the cost accountant. There are in all over two hundred exhibits of this sort. The forms illustrate the most up-to-date practice and they are sufficiently wide in their scope to cover all the requirements of any concern — it being understood, of course, that a reasonable amount of judgment must be used by the reader in modifying them to meet peculiar local conditions.

Great care has also been taken to formulate clear and comprehensive definitions that are adhered to after their initial statement. We have considered it good policy in exposition to lead up to the definitions, rather than to present them at the outset when the reader has little background for their comprehension. To illustrate, we may refer to the definitions of " prime cost " on page 20 and " overhead expense " on page 24 and the manner in which they are developed.

A distinct contribution to the science of cost accounting is made in the bookkeeping that is set forth in this work. Here all the elements of cost are brought together, and the operation of all controling accounts is explained. The interlocking of cost accounts with the financial records is fully set forth. It is here that the science of cost finding reaches its highest development. Obviously, any cost records that do not interlock and fully harmonize with the books of the concern are but crude guides for the executive. The bookkeeping methods whereby the cost data may be checked and controlled by the books of the concern are presented for the first time in this general treatise.

Toward the end of the book several complete cost systems are explained, so that the student may gain a comprehensive grasp of a cost system and understand the way in which it operates as a whole. Many statistical charts are introduced in order to show how cost data can be presented to the busy executive in graphic form. Finally, the most recent developments in association cost-finding

PREFACE ix

systems are outlined. These last chapters will acquaint the student with the most modern tendencies in the field of cost finding'.

We would suggest that teachers using this book for classroom instruction may find it profitable to follow the methods which Professor Eggleston uses in his own classes. After covering the material in Parts I and II of the book, it is his custom to assign to the students readings in the succeeding parts to be carried on concurrently with the solution of assigned problems in his earlier Problems in Cost Accounting. The principles presented in this text follow the same sequence as the problems presented in the earlier book. At the College of the City of ISTew York, the cost-accounting class meets once a week for a two-hour session. During the second semester of sixteen weeks the remaining parts in both books could be covered. It is highly desirable that the student should have had instruction of at least a year in general accountancy before he takes up the study of cost accounting; certainly he should have that much instruction and preferably as much again before he undertakes to study the principles set forth in Parts VI and VII of this book. To facilitate review, lists of questions have been appended to each chapter.

If the users of this book discover any important subject or problem in cost accounting not covered by the work, we should be pleased to have our attention directed to the omission. Of course, all works are susceptible of improvement, and we should be most grateful for any suggestions for the improvement of the matter here presented or for any hints concerning the most advantageous way of using this text in the classroom.

Frederick B. Eobixson

Contents

PAGE

Preface . . . m v

PAKT I COST ACCOUNTING

Part II Production And Costs

VI. Production Records 59

66. Relation of Production Records to Cost Finding 59

67. Reports vs. Orders t 60

68. Card Room Daily Report 60

69. Production Record 62

70. Foundry Daily Production Record 63

71. Automatic Counting 64

72. Production Orders 65

73. Classification of Production Orders 65

74. Production Order for a Printing Factory 66

75. Production Order for Shoes 67

76. Style Number Index Card 69

77. Production Orders in an Ostrich-Plume Factory 71

78. Parts System for a Machine Shop 76

79. Stock List 76

80. Assembly Drawing 77

81. Individual Parts Needed by the Assembly Foreman .... 77

82. Parts Entering Partial Assemblies 78

83. Raw Material Index 79

84. Operation Index 79

85. Square-Turn Farm Tractor 80

86. Production System in Assembling Industries 81

CONTENTS xiii

87. Dispatching Orders 82

VII. Cost Summary Forms 85

89. Cost Sheets 85

90. Cost Sheet for Shoes 86

91. Individual Order Cost Sheet ... 87

92. Cost Summary Form for Separate Burden Application ... 89

93. Cost Summary Form for Machine Shops 89

94. Cost Record 89

95. Special Cases 91

Part III Material Costs

VIII. Introduction to Material Costs 95

96. Cost of Material 95

97. Material Cost Calculations 95

98. Loss Due to Waste Material 96

99. Means for Controlling Stores 96

100. Purchasing System 97

IX. Purchasing and Voucher System 99

101. Purchasing Agent 99

102. Purchase Specifications ' 99

103. Purchasing Records 100

104. Quotation Record 101

105. Vendors' Record 101

106. Catalogues and Discount Sheets 102

107. Requisition on Purchasing Agent 102

109. Petty-Cash Voucher 105

110. Voucher Stamp 105

111. Purchase Journal 106

112. Charge-Back Invoice 107

113. Voucher File 107

114. Liquidating Purchases 109

115. Voucher Checks 109

116. Cash-Paid Book 110

117. Bills-Pavable Record Ill

118. Daily Cash Report Ill

X. Stores Organization 114

120. Stores Control 114

121. Material Obtained from Natural Sources 114

122. Material Purchased and Put into Process at Once . . . . 115

123. Reserve Stocks of Material 115

124. Reserve Stocks in Broken Lots 116

125. Personnel of the Storehouse 117

126. Fixing Responsibility for Inventory 118

127. Stores Location 118

128. Stores Arrangement 119

129. Waste and Junk 119

130. Storehouse Equipment 120

131. Bin Arrangement in a Store Room 120

132. Special Containers 120

133. Counting Machines 121 xiv CONTENTS

134. Automatic Scale 121

135. Identification of Stores 121

136. Stores Directory 121

137. Maximum and Minimum Limits 122

138. Stores Turnover 122

139. Waste, Breakage, and Leakage 123

140. Stores Expense 123

XL Stores Classification 125

142. Stores Symbols 125

143. Mercantile Storeskoeping 125

144. Classification Systems 126

145. Numerical Code : Block System 126

146. Numerical Code: Dewey Decimal System 126

147. Uses of the Decimal Point 128

148. Mnemonic Symbols 128

149. Combination of Letters and Numbers 129

150. Stores Catalogue 130

151. Uses of a Code 131

XII. Typical Forms and Routine Connected with the Receipt and

Issue of Stores 132

153. Requests for Stock 132

154. Receiving -Record 132

155. Reports of Stores Issued to Factory 133

156. Recording of Stock Issued 134

157. Storeskeeper's Daily Report of Stock Issued 135

158. Report of Cotton Opened 135

159. Record of Raw Hides Issued 136

160. Requisition 137

162. Cutting-Room Record of Linings 138

163. Memorandum of Heels 139

164. Dimension List 140

165. Distribution of Material 141

166. Raw Material Returned to Stock 142

XIII. Perpetual Inventories: Stores Accounts 144

168. Stores Ledger 144

169. Numerical vs. Alphabetical Arrangement 144

170. Cards vs. Loose-Leaf Stock Records 145

171. Money Cost Shown on Stock Records 146

172. Location of Stores Ledgers 147

173. Lot Number Svstem 147

176. Stock Record Showing Quantities Only 149

177. Raw-Stores Record for Lots 150

178. Finished-Goods Stock Record Showing Quantity and Amount . 151

179. Stock Record with Paid-Duty Feature 152

180. Desk Containing Stores Ledger Cards 152

181. Records of Small Tools 152

XIV. Physical Inventories 156

183. Inventory Date 156

184. Preliminary Steps 156

CONTENTS xv

CHAPTER PAGH

185. Inventory Tags 157

186. Inventory of Supplies 157

1ST. Inventory Sheet with Coupon 159

188. Inventor}' of Sole Leather in Process 160

18!). Inventory Instructions 101

190. Pricing the Inventory lGJ

XV. Rebates, Shrinkages, and Margins of Error in Calculating Material Costs Peculiar to Special Industries 164

192. Cost Formula for Material 104

193. Cost of Raw Material 104

194. Containers and Coverings 165

195. Scraps and Cuttings 105

196. Refinings 105

197. Invisible Waste 105

198. Waste in Cutting Lumber 106

199. By-Products 160

201. Junk Department Expense 168

202. Cain in Weight 168

203. Loss and Gain on Estimates JOS

204. Sorting and Grading Material . . 170

205. Cost of Material Mined or Quarried 170

206. Take-Up in Weaving 170

207. Take-Up in Twisting Rope 171

208. Mixtures 171

209. Cloth Organizations 172

210. Textile Calculations 173

XVI. Cost Arithmetic Connected with Material Expenditures . . 175

212. Xeed for Accurate Data Regarding Material 175

213. Grading Material 175

214. Conversion Factors 176

215. Cost of Dressed Goods 177

216. Repricing Graded Material 178

217. Alligation 179

218. Waste Products in Handling Xon-Ferrous Metals .... 181

219. Invisible Waste 182

220. Waste Products in Woolen and Worsted Mills 182

221. By-Products 183

222. Percentage of Gain, Loss, and Yield 184

223. Cost of Yield 185

224. Remnants 187

225. Take-Up in Weaving 187

226. Textile Calculations 187

PAET IV

XVII. Introduction to Labor Costs 195

228. The Element of Labor Cost 195

229. Time Work 195

230. Piecework 196

232. Distribution of Time in Process Plants 196 xvi CONTENTS

233. Distribution of Time in Job-Order Factories 197

234. Time-Recording Devices 198

235. Factory Organization 198

XVIII. Departmentalization of the Payroll 199

236. Classification of the Payroll 199

237. Departmentalization 200

238. Examples of Departments 201

239. Organization Charts 201

240. Organization Chart for a Silk-Throwing Mill 202

241. Organization Chart for Job-Order Printery 203

242. Organization Chart for a Jewelry Manufacturing Establishment 204

243. Organization Chart for a Machine Shop and Assembling Plant 206

244. Organization Chart for a Worsted Mill 207

XIX. Systems of Wage Payment 209

246. Labor Cost Calculations 209

247. Hour-Rate System 210

248. Overtime 210

249. Piecework Svstem 211

250. Taylor Differential Wage Rate System 213

251. Halsey Premium Wage System 214

252. Rowan Premium Wage System 216

253. Gantt Task and Bonus System 217

254. Emerson Efficiency Bonus System 218

XX. Payrolls 221

256. Calculation of Employees' Earnings 221

257. Functions of a Timekeeping System 221

258. Employee's Information Blank 222

259. Employee's Application and Record Form 222

260. Employee's History Card 223

261. Timekeeping Systems in General Use 223

262. Card Time Recorder 223

263. Clock Xumber Card 225

264. Time-Clock Cards 225

265. Dial Time Recorder 226

266. Pavroll 226

267. Payroll Strip 227

268. Piecework Records 228

269. Employee's Piecework Record, Front and Back 229

270. Checking Card 230

271. Piecework Ticket with Coupon 231

272. Piecework Card 232

273. Working Sheet 232

274. Advance Wage Vouchers 233

276. Payroll Sheet Showing Overtime 234

277. Addressograph 236

279. Payroll Analysis Sheet 238

280. Payroll Analysis 238

XXI. Labor Costs 241

282. Labor Cost Records 241

283. Dailv Time Sheets vs. Individual Job Cards 241

284. Daily Time Report 241

CONTENTS xvii

285. Individual Job Time Ticket 242

2S6. Decimal System of Time Recording 243

287. Operative's Time Ticket 244

288. Individual-Job Time Ticket 245

289. Mechanical Aids 247

290. Electric Time Stamp 247

291. Job Time Ticket 249

292. Daily Time Ticket 249

293. Calculagraph 250

294. Calculagraph Time Card 250

295. Operative's Time Record 251

296. Weekly Operation Report, Coats 252

XXII. Cost Arithmetic Connected with Labor Expenditures . . . 255

298. Local Conditions Affecting Cost Calculations 255

299. Slide Rule for Reducing Regular Time, Over-Time, and Double

Time to Single Hours 255

302. The Calculus 258

303. Piecework Rates 258

304. Taylor Differential Piece Rate System 264

305. Halsey Premium Wage System 265

306. Rowan Premium Wage System 266

307. Gantt Task and Bonus System 267

308. Emerson Efficiency Wage System 269