The importance of efficiency in business organization has never been so generally recognized as at the present time, and the subject presents an even greater field for development in the future. One indication of this is the increased volume of literature that is now available on the subject. More than 90% of this literature has been published in the last decade, and fully 75% in the last five years.
The ultimate causes of this are to be found in the broad field of economics. The gradual absorption and development of natural resources, the exploitation of new fields of commerce, the increase of population, the higher standards of living and greater complexities of demands in modern life—these are but a few of the innumerable influences reflected in the industrial life of today.
Transformed to some extent, these changes meet the manufacturer in the form of demands for more wages and better labor conditions, in the increased cost of materials, and in a much keener competition in every phase of manufacturing and selling his product. He must either adapt his methods to meet the situation, or retire from the field.
Only one practicable road lies before him, and that is a keener realization of the existing possibilities in his business. To be specific, he must eliminate waste of every kind, and plan his organization so as to increase the production per unit of cost, which is another way of saying he must introduce efficiency methods.
Various Phases of Efficiency Progress
This search for efficiency appears in many phases which overlap each other, more or less. From the mechanical standpoint, it involves a study of plant location and construction, new and better types of machines, economies in producing and using power, etc. From the labor standpoint, it has given rise to new and improved methods of wage payment, such as the differential rate plan and the premium and bonus methods with their various modifications, all of which offer increased pay for greater individual effort and efficiency. Even the motions and positions of the workmen are being analyzed into their component parts, with the view of eliminating those unessential to the process in hand. While some of these methods are still novelties, yet the time is not far distant when most manufacturers will have to do something of this kind for their own salvation.
From the standpoint of factory organization, more has been attempted and accomplished, because the need has been pressing and immediate. The purpose here is to bring the activities of the whole plant, no matter how widespread, under the direct review and control of the management. It is felt, and rightly so, that a considerable loss is incurred unless efficient systems and reliable statistics enable the management to keep in touch with the various steps of production, and to locate the responsibility for waste, lost time, shop errors, etc.
Quite as essential in its bearing on efficiency is the process of cost finding; that is, finding just what it costs to manufacture a certain order or article. Not only is this necessary to determine possible selling prices, but it provides the ultimate measure by which manufacturing methods may be compared, and the best selected.
General Functions of Cost Accounting
While the present book treats primarily of cost accounting, it would be a mistake if its scope were limited to finding costs only. Any good cost system, properly operated, performs two distinct, though related, functions.
The first, which may be called the direct function, is that of ascertaining actual costs.
The second, or indirect function, is that of supplying, in its system of reports, the information necessary to organize the many departments of a factory into working units, and to direct their activities in accord with some definite plan.
Cost Accounting as Related to General Accounting
Cost accounting, as a science, is a branch of general accounting. Its province is to analyze and record the cost of the various items of material, labor and indirect expense incurred in the operation of a factory, and to so compile these elements as to show the total production cost of a particular piece of work.
With the cost books once established, the best modern usage is to incorporate their record in total in the general financial books. In this way the modern cost system builds up an interlocking series of accounts which furnish the material for a detailed study of the operations of a manufacturing business.
The accounts which appear in the cost books, however, differ in nature and scope from those in the general financial books. The latter exhibit the complete record of the financial and commercial transactions of the company, whereas the former treat only of those transactions which deal with, and are properly chargeable to, the manufacture of the product. Like the general books, the cost records show the amounts spent for material, supplies, labor and indirect expenses; but in addition there appear accounts with the various operating departments, classifications of the product, part-finished stock, etc. It is these latter accounts that make an analysis of costs possible.
Functions of a Cost System
The functions performed by a cost system with respect to increasing the efficiency of a plant from an organization standpoint may be noted under the following heads:
(1) The records provide for a perpetual inventory, and also for the preparation of monthly statements showing the industrial and financial condition of a company.
(2) The cost of each article or class of product being separately shown, the management has invaluable data at hand to guide it in making changes of policy or methods.
(3) Comparative costs for different periods and under different conditions are obtainable.
(4) The records provide for following the material from the raw state until it is finished product, and for ascertaining the time, labor and expense involved in its manufacture. In this way losses of material, wasted time, defective work, poor foremanship, and various other ‘”leaks” are detected.
(5) A cost system supplies the information necessary to standardize the work of a plant.
The five items above mentioned are not to be regarded as a brief for the value of cost systems, but rather as an analysis showing the lines along which a cost system influences the factory organization.
Application of Cost Principles
The principles underlying cost finding have all been analyzed and defined; but when it comes to the actual installation of cost accounts, the greatest skill and caution must be observed in applying these principles to the conditions that exist. No two manufacturing plants are alike, not even in the same line of business. Every plant has peculiarities that bear upon the methods of cost finding; and this makes each factory a problem in itself. It follows that in either writing or reading a treatise on the subject, this distinction should be clearly conceived. The knowledge of principles, without a corresponding familiarity with the facts and conditions of manufacturing, produces the theoretical cost finder, who is apt to be a nuisance. On the other hand, it is only the shallow thinker who trusts to a superficial study of forms and accounting practices, with the idea that such knowledge prepares him to go into any business and install a cost system. To attain success in cost work, one must see and understand the application of the principles to the conditions which actually exist.
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