Cost Accounting – Product System – Productive Labor Method

In the two special order systems the costs are collected on the production order. In this system the costs are collected on the production report.
The present system differs from the last two systems described in its methods of distributing indirect expense, and also in the fact that the complete costs are gathered departmentally and transferred progressively from one department to another. The costs in this system have no relation to customers’ orders, as the goods are manufactured and carried in stock, and orders as they come in are filled from this stock.
Purchase Forms
The following purchase forms are used in the present system:
Purchase Requisition (Form 1)
Purchase Order (Form 2)

These forms are the same as shown in Chapters XIV and XV, and may be used in this system unchanged.
Report of Material Received (Form 4)
It will be noted that this form is quite different from that used in Chapters XIV and XV. In many cases, where a product system is used, raw material and supplies will be ordered in large quantities, and in such instances the freight charges will be considerable. Provision is therefore made in this form for a complete distribution of freight and other charges bearing directly on the cost of material.
Under the caption “Article,” the lot number, description, and quantity only are filled out by the receiving clerk, all other columns being entered in the office. When the entry is made from this form to the raw stock record, the cost will be the total cost of the article after the distribution of charges has been made.
From the information under the caption “Factory Ledger,” the record on the accounts payable voucher will be made. The entry of material received is made on the raw stock records, and also on the accounts payable voucher in conjunction with the invoice.
Accounts Payable Forms
For the present system these forms are as follows:
Accounts Payable Voucher (Form 7)
Register of Accounts Payable (Form 9)

A general explanation of these forms will be found in
Chapter XV.

Stock Record—Raw Material (Form 12)
This form is one of the most complete records used for raw material stock. As a mere record of raw material stock received and delivered, it would be unnecessary to have all the information called for by the form as shown; but in most cases such additional information is of distinct value to the management.
The special feature of this record is the provision made
1 to show amounts of goods ordered, the amount reserved for some particular purpose, and the amount of stock available for general manufacturing purposes.
The entries on this record are made from the purchase order, the material received report, and the report of material delivered. The information under the caption “Reserved” comes either from the purchase requisition, purchase order or some other special source.
Production Order (Form 13)
The “Production Order” in this system is intended only as an order to the factory to manufacture a certain amount of goods. A form of this kind should also be used for work of any description or character performed in the plant, such as repairs, improvements, building of new machinery, etc. Costs are charged to such production orders in the same way as to the regular production order.
Material Requisition (Form 18)
The form presented is intended only to register material taken from stock according to department, order number or product chargeable, article and quantity, and as the information on these records is transferred to a summary of material requisitions or reports of material delivered, it is unnecessary to price the articles on the requisition.
Report of Material Delivered (Form 25)
The material requisitions are summarized on this form according to department and order number or product chargeable, the product chargeable being entered from the material requisition as to classifications of product. The report is priced, this information being taken from the stock record of raw material received, and is entered on that record under the caption “Delivered.”
Employees’ Time Report (Form 32)
The form of time report selected for presentation here requires the time to be punched either by the workman or foreman, or by some one detailed for that purpose.
Across the left end of the card are printed the hours from 6 to 12 and from 1 to 7, and the minutes are printed beneath, with a leeway of ten minutes between each operation, to provide for recording the finishing time of the operation just completed, and the beginning time of the new operation. If necessary, the design may be so ruled as to reduce this leeway to a minimum of two minutes. Along the sides of the card are printed the operations of the particular plant. Where the operations are not numerous, all operations may be printed on all the cards; but where there are a large number it is wise to print departmental cards, each showing the operations peculiar to its department.
The body of the card calls for the order number, date, department, employee’s number, article, quantity produced, piece rate, time rate, premium rate, and total time. There is also provision for waiting time. A form containing only the order number, department, and labor cost can be used in this system, if desired.
The information contained on these time reports is transferred to the pay-roll, and also summarized and posted to the cost sheet.
Pay-Roll (Form 39)
The pay-roll is used, as in the preceding systems, for ordinary pay-roll purposes, and also for the distribution of the labor into direct, indirect, and supervision. The total of the pay-roll is entered on the accounts payable voucher for distribution to the factory ledger according to department and account.
When the pay-roll entry is made from the voucher into the register of accounts payable, it is charged in the “Factory” column.
Defective Work Report (Form 51)
While the defective work report is presented only in connection with the present system, it should be used in every system, as defective work is common in every plant. In some plants the labor cost of the defective work is deducted from the pay of the employee, and in very rare instances the material wasted is also charged to him.
Under the system here discussed, the loss caused by defective work is a departmental charge against indirect expenses, the account in the factory ledger usually appearing under the caption “Defective Work.” If any part of the material is to be used again, a value should be put upon it, and this amount deducted from the total defective work cost and charged to the stock records.
Factory Ledger (Form 67)
The factory ledger is used to classify all the details of factory operations.
A ledger sheet or page is used for each department, and a number of sheets are used for general operating expenses, according to the account number. In addition, sheets should be used for raw material, part-finished, and finished stock, these giving the controlling accounts for the three classifications of the stock records.
The entries under “Material” are made from the report of material delivered, according to department. The information under “Labor” and “Indirect” is taken from the accounts payable voucher, according to department. Under the caption “Total Charges” is shown the total of all expenditures charged to a particular department. Under the caption “Credits” will be entered the total of each departmental cost, as shown by the report of production and costs.
The balance as shown by the factory ledger for any operating department will represent the value of the goods in process in that particular operating department.
Statement of Factory Expenditures (Form 43)
The purpose of this form is to show the operations of a factory for a month or cost period. It is especially suitable in a system where the productive labor method is used, for determining the percentage of indirect expense to be applied to the cost of each order or article.
It would be well in this system to keep an account in the factory ledger of the indirect expenses, according to department, charging the total indirect expenses and crediting the department account each month with the percentage used on the report of production and costs. These departmental indirect expense accounts will then show to what extent variations exist between the fixed or arbitrary percentage and the actual, and will thus be a means of correcting the fixed percentage to a fair degree of accuracy.
Summary of Production and Costs (Form 54)
The summary of production and costs is used in ascertaining the complete departmental costs of an order, including the indirect expense. Individual reports are used for each department, and the total costs of each department are transferred to the succeeding department until the final operations are completed, when the total costs are transferred to finished stock. The first department naturally would have no record under the caption “Previous Operations”; but it should be borne in mind that an article may be transferred to part-finished stock at the end of an operation; and when these part-finished articles are put back into process for completion their total cost should be entered on the summary of production and costs under the caption “Previous Operations.” The production reports may be made daily or weekly, depending on the nature of the product.
The information for the summary of production and costs is obtained as follows:
Under the caption “Material,” from the report of material delivered, and under the caption “Labor,” from the time reports. Under the caption “Indirect,” a department rate is used for calculating the amount on the basis of labor cost, as shown in the “Labor” column.
In the production report proper, the article, order number, and quantity columns are filled in by the foreman of the operating department, all other columns by the cost clerk. The totals of the material, labor and indirect columns are posted to the credit of the proper department account in the factory ledger. When the final form passes from the last operating department, with all the accumulated costs recorded, the “Quantity” and “Total” columns are charged to the finished stock records under the proper classification.
The fundamental principle of the system, which is to show at all times the progress of any particular order and the cost of all orders in process, by departments, is well illustrated by the summary of production and cost. If one of these forms is used for comparative costs, according to department and classification, it will be found of considerable value to the management.
Stock—Finished Product (Form 59)
An ordinary stock form showing production, sales, and balance, could be used in this system instead of the form shown; but as other information is frequently required in connection with finished stock, the design presented here will be found more useful.
The particular features of this form are the columns headed “Orders Received,” “Orders Cancelled,” and “Unfilled Orders.” The information coming under the caption “Production” is taken from the final departmental production report just described. The information under the captions “Orders Received” and “Orders Cancelled” is obtained from the order department, and the information under the caption “Unfilled Orders” is calculated on the form. The information under the caption “Sales” is taken from the sales sheet, providing the cost of the sales is entered on the duplicate copy of that record; otherwise it is taken from the “Summary of Production and Costs,” the sales being taken out of stock at cost price.
Other Forms Used
Part-Finished Stock (Form 56)
Inventory Test (Form 60)
Sales Sheet (Form 62)
Credit Certificate (Form 63)
Register of Sales and Costs (Form 64)
Statement of Profit and Loss (Form 68)
Balance Sheet (Form 69)
These forms are of the same general character as those described in previous chapters.
Explanat1on Of Chart And Summary Of Entr1es
Subsidiary Forms and Records
The forms necessary in collating the information relative to the authorization and purchase of material and supplies and the incurring of other expenditures, and also those forms necessary to record the receiving, storing and requisitioning of raw material, are used in the same manner as in the two systems previously described. The particular distinction in recording the information upon the subsidiary records lies in the method of compiling the cost data, which is done departmentally.
The raw material and supplies delivered to operating departments are charged from the report of material delivered to the summary of production and costs of the various operating departments. In like manner the labor costs are transferred from the time reports; and the indirect expenses are distributed upon a fixed basis, and charged from a previously prepared statement of factory expenditures which shows the percentages to be used in the various operating departments.
There are only three operating departments used for illustrative purposes in this chart, but, of course, the same principle applies regardless of the number of operating departments, which will be determined by the conditions of manufacture in the particular plant. The defective work of any operating department should be reported on a defective work report, and transferred from the summary of production and costs to a report showing the defective work, and the disposition of the same. The total cost, as shown by the summary of production and costs of each department in turn, is transferred to the succeeding department as operations progress until the work is completed or is transferred as part-finished stock.
In case of the manufacture of finished parts, transfers may be made from either one of the first two operating departments to the part-finished stock record. When these parts are put back into operation to be completed, they are transferred from part-finished stock to the proper department. When the article has passed through the final operating department, which, in the case illustrated, is Department 3, its total cost is transferred, by means of the summary of production and costs, to the finished stock records, according to classification.
The subsidiary forms used to record information as to the sale and shipment or return of part-finished stock and finished stock, have been sufficiently described in the previous systems.
Method of Control
The method of control in this system differs from the method described in the previous system in that the factory ledger is made self-balancing. The general ledger accounts affected in this system are the same as those affected in the previous one, and are debited and credited in a similar manner. The accounts kept in the factory ledger are as follows:
(1) Raw Material
(2) Direct Labor
(3) Accounts with the items composing the indirect expenses
(4) Accounts with the various operating departments
(5) Part-Finished Stock
(6) Finished Stock
(7) General Ledger Account
(1) The Raw Material account is debited from the register of accounts payable with the total purchases, and with any material put back into stock, as obtained from the defective work report. It is credited with allowances and with the total raw material delivered to operating departments, as per the report of material delivered. The Raw Material account is the controlling account for the raw stock records; and the balance of this account should agree with the total of the balances of the detailed stock records which represent the raw material inventory.
(2) The Direct Labor account is debited from the register of accounts payable with the total amount of direct labor, and is credited from the summary of time reports with the distribution of direct labor when same is charged to the various operating departments.
(3) The accounts representing items of indirect expense are debited from the register of accounts payable with the amount of expenditures incurred, and are credited with the distribution, as per the statement of factory expenditures, when this is charged to the various operating departments.
(4) The accounts with the various operating departments are debited:
(a) With the total amount of raw material as per the report of material delivered
(b) With the total amount of direct labor as per time report summary
(c) With the total amount of indirect expenses, as per the statement of factory expenditures
(d) With the total cost of any previous operations upon the article when it is transferred to one department from a previous department, as per a summary of department transfers, or with the total cost of finished stock put back into process to be completed
The department accounts are credited with the total cost of the transfers to a succeeding department, as per the department transfers, and with the total cost of defective work, as per the defective work report summary, at the time this is charged to the Defective Work account. The department accounts are also credited with the total cost of finished parts, as per a summary showing the cost of these finished parts when they are transferred to the PartFinished Stock account; and the final Operating Department account is credited with the total cost of the finished stock, as per summary, when it is charged to the Finished Stock account. The balance of the Operating Department account represents the cost of the work still in process in each operating department, and should agree with the detailed reports of production and costs in each department.
The Defective Work account is charged with the total cost of defective work from the defective work report summary, and is credited with the total cost of the raw material reclaimed and transferred to the raw material records, the balance of the account being treated as part of the indirect expenses.
(5) The Part-Finished Stock account is debited with the total cost of the part-finished stock, as per summary, and is credited with the total cost of the same when put back into operation to be completed, and also with the total cost of finished parts sold, as per the register of sales and costs. The balance of the account shows the total amount of partfinished stock on hand, and should agree with the detailed stock records of part-finished stock.
(6) The Finished Stock account is debited with the total cost of finished stock, as per summary, and is credited with the total amount of the cost of the sales, as per the register of sales and costs. The balance of the account represents the total amount of finished stock on hand, and should agree with the total of the balances of the detailed stock records.
(7) The General Ledger account is debited with the total cost of the sales, as per the register of sales and costs.