Cost Accounting – Examining the Plant


Reasons for Examination
The basis of any successful cost system must be sought in the nature of the manufacturing operations, and this presupposes a physical examination of the plant. It is not enough to inspect the books, for an analysis of accounts cannot give all the necessary data. The extent and character of the information needed is limited only by the boundaries of the business; and its classification is a matter of highest importance to the systematizes He should have a definite knowledge of how to go at things, and of the object of each question he may ask. In other words, the examination should be systematic and thorough.
The examination should begin where the raw material is received, and end with the office records. It should follow step by step each process of manufacture, including the auxiliary activities of the plant as they arise in connection with the operations. Circumstances will determine just where, along this line, the power plant should be inspected, but the application and transmission of power should be considered in connection with each department.
The general type of system will be suggested by the nature of the product and processes, and one of the first considerations must be to see that the lines are properly drawn between processes, so as to provide for a working system of operating departments. As far as possible, each department should be limited to single operations, in order that the costs may be analyzed in the same measure.
The necessary information for the installation of a cost system may be divided into four general classifications, viz.:
(1) Raw material
(2) Power, machinery and processes
(3) Direct labor
(4) Indirect labor, supplies and general indirect expenses
Raw Material and Storeroom
Under raw material, it should be noted how the raw material is received, checked, stored and put into operation. It should then be followed through the factory, step by step, until it is ready for sale as finished stock. The maximum and minimum quantities necessary should be known, and the disposition or utilization of waste and scrap material should be looked into carefully. Special attention should be given to the methods of storing material and part-finished stock, and to the possibility of improvements along that line. If a stock system is not used, there is no one place where leaks are more likely to be found than in the storeroom. The ordinary manufacturer insists that his cash be kept exact to the cent, while hundreds of dollars’ worth of material may lie around in different parts of the plant with no effective methods of safeguarding it, or even of showing when parts of it have disappeared. The extra trouble of keeping a stock system is usually paid for many times over by the saving of stock and the practical value and convenience of being able to tell at any time just what stock is on hand and where it is.
As a rule, the best plan is to have one storeroom centrally located; this, however, is not always practicable. For instance, pig iron should be unloaded in the yards close to the cupola, and certain materials must sometimes be shipped direct to an operating department and not opened until used.
Power, Machinery and Processes
The information relative to machinery should include cost, floor space, and, in fact, all data necessary for the calculation of assignable indirect expenses.
It should be determined whether tests for power have ever been macje, and if the conditions make it desirable, the tests should be brought up to date.
The general arrangement of the departments and machinery should be inspected very closely, with the idea of making the whole process as continuous as possible. Much time and money are wasted in rehandling material, when machines are placed in disadvantageous positions.
The average and maximum efficiency of machines should be known, and whether they are automatic or otherwise, This latter point is often important in arranging details for the gathering and compiling of costs. If a machine rate is to be used, the examination is, of course, more detailed and thorough than in the case of the productive labor method.
The number of men occupied in productive labor must be recorded for each department, and distinguished from those occupied on indirect labor. The entire labor force of the plant must be classified in this way according to departments. The wages paid are not a matter for immediate consideration, though the method of payment is important, as it may make considerable difference in the design of time cards, and often in the method of distributing the indirect expenses.
The information regarding machines and necessary supplies must also be arranged according to departments, so that these items may be used in calculating the departmental indirect expenses.
Indirect Expenses
The last step is to classify all the general expenses so as to provide for an analysis by items. Expenses that can be connected with any particular operation should be distinguished from the general expenses; and expenses such as depreciation, insurance, heat, etc., should be dissected and apportioned over the departments and plant as a whole, according to the plan to be used.
Much of the data relative to labor, supplies, and general operating expenses may be found in the general accounting books, but whether or not the accounts in these books will be useful for classification of expenses depends entirely upon how they have been kept. When the accounts show the expenses well itemized and arranged, they may present valuable information which would otherwise have to be determined by estimate or experiment. The manufacturer may not care to have his whole bookkeeping system revised, and this should be borne in mind in arranging the details of the cost accounts.
In addition to collecting constructive information along the general lines mentioned, the examiner should keep in mind many other considerations which relate to efficiency. Some of these have already been mentioned or implied, but it would be well to classify them along definite lines. They do not apply to any particular part of the examination; but every phase of manufacturing should be criticized from an efficiency standpoint.
The underlying purpose of organization is to bring each and every activity of a plant under the notice and control of the men responsible for its proper operation. Thus, in inspecting any department, its relation to the preceding and succeeding departments, and the methods by which its operations are reported and controlled by the shop manager, should be carefully studied. The whole field is so large that it is only possible to suggest certain necessary lines of investigation. For instance, storeroom facilities and the stock system in use, as mentioned before, should be reported upon, and the report should also cover part-finished stock, the assembling department, tool-room, patterns and dies, defective work reports, the method of requisitioning material and supplies, handling of time reports, inspection of work, the packing and cleaning departments, how production orders are issued and production reports made out, how the work is planned in advance, how excess time on operations is accounted for and how responsibility is defined. These and many other questions arise during the course of the examination, and none of them should be slighted.
Mechanical Aids
Besides the examination of the regular machinery, attention should be directed to the auxiliary mechanical service, which is a very important factor in running a shop to the best advantage. This field, like that of organization, is wide; but the following subjects are suggested which may give rise to practical ideas: time clocks, time stamps, patent time cards, carrying belts, automatic counters, arrangements of yard service, factory telephones, mechanical devices in the office, standard jigs and dies, special arrangements for heavy or peculiar tools, etc.
The matter of heat, light, and ventilation is so important that it requires special attention. Bad air makes the workmen dull and listless, and everything drags, simply because there isn’t enough oxygen on hand to supply the blood properly. Less work is done at a greater expense of effort.
A watch should be kept for “leaks,” especially in places where they may exist unnoticed. The wastes that appear in lost or spoiled material and time idled away are among the more prominent and more costly leaks. Large losses are sometimes incurred by failure to completely check material received, as in cases where barrels are not opened to see that they are full, etc. Spoiled material is likely to be concealed if there is not a system of material requisitions in use. Time may be lost through poor foremanship, especially where departments are not properly balanced, and where the men in one department wait for another department to send work to them.
Time lost in carrying materials, crowding of aisles with goods, scattering of men’s time on odd jobs, unnecessary consumption of power, waste of scrap material, inconvenience in location of tools and dies, poor toilet facilities, etc., are all signs that losses are being incurred which, although small in any special case, amount to considerable sums when spread over a whole factory for a period of time.
The examiner should also take note of all places where the work seems to be going on half-heartedly. Such places will require attention and perhaps special measures, but the returns will justify it.
While the examiner’s mind is occupied with the active details of his examination, he must be subconsciously considering how each feature that develops is going to find a place in the cost system, and what special modifications are needed to make the system fit the conditions. Thus his information is of two kinds: first, the constructive information necessary to the designing of the system; and second, a critical knowledge of the defects and inefficient spots that need immediate attention. It must not be thought, however, that an examination will discover anything but surface defects; it remains for the cost system itself to detect and locate those beneath the surface.
Details of Examination Information
It is suggested that the examiner have with him a schedule of questions which will serve both to classify his information and to keep him from overlooking more or less important details. The questions which follow, while suitable for this purpose, are not expected to cover every possible condition. The examiner in charge will be able, however, to cover the greater portion of the investigation by use of these queries and instructions, and to supplement them when necessary. It is impossible to obtain too much information, and nothing is too unimportant to notice.

Schedule Of Quest1ons For Exam1nat1on Of A Plant
(1) Purchase Division
1. Are purchases made on verbal or written requisitions? Give full particulars.
2. Is there any one responsible head, or are purchases made by several? Particulars.
3. Are complete records made of quotations received?
4. Is any accounting done in this division? If so, describe it.
5. Describe filing methods, including catalogues.
6. Are any orders placed verbally? If so, are they promptly confirmed in writing?
7. Obtain copies of all forms and books used.
8. Give office force and duties of each.
9. Remarks.
(2) Receiving Department
1. How are incoming goods handled?
2. Are there any mechanical appliances? Describe.
3. What records are maintained?
4. Is there a track scale and a car record kept? If not, how are car-loads received and checked out?
5. How are partial shipments checked up and reported?
6. Is trucking equipment owned? What sort?
7. Obtain copies of report or record forms, books, etc.
8. If any goods are returned, how is accounting handled?
9. How are overs, shorts or damaged goods reported to purchasing department?
10. Remarks.
(3) Storeroom
1. Are storerooms maintained for all raw materials and parts?
2. How many, and where located?
3. Do employees have access to stores?
4. Are heavy goods conveniently arranged as to classes and convenience of handling? Are they properly marked or tagged, and are there signs or other methods for locating classes?
5. Are there any mechanical devices such as trolleys, tiering machines, cars, etc.? If so, describe.
6. Are there bins, shelves, racks, etc., of sufficient capacity, and are they arranged to best advantage for economical handling of goods?
7. Are bin cards used?
8. Are parts manufactured and carried in stock?
9. Could any such parts be purchased for less money?
10. Is raw material carried in stock after passing through a process? If so, describe and state why.
11. How is the quality of goods tested when received?
12. What checks are maintained as to correctness of deliveries to manufacturing departments?
13. How are such deliveries made, and are there tote boxes or other standard devices used?
14. Are all deliveries covered by requisitions? If not, note exceptions and reasons.
15. Does storekeeper have copies of all standard bills of material or specifications?
16. Are factory supplies furnished to departments on requisition? If not, how handled?
17. Are obsolete parts or surplus stock reported regularly to the management?
18. How are returnable containers handled and accounted for?
19. How does storekeeper request purchases?
20. Is a perpetual inventory maintained, and, if so, how verified?
21. Does such inventory show quantities only, or values and costs as well?
22. How many employees, and what are their duties?
23. Does department appear to be efficiently handled?
24. How does storekeeper handle excess materials issued and returned to stores?
25. Obtain copies of every form or record.
26. Remarks.
(4) Dry Kilns
1. Type of kilns used; i.e., direct heat or vapor process? Describe equipment and manner of operating.
2. Is exhaust steam or live steam used?
3. Is lumber measured or weighed in and out? If not, how is quantity dried accounted for?
4. Is there any special fire protection? If so, what?
5. How far away from factory buildings are dry kilns located?
6. Is any attempt made to record cost of drying? If so, state particulars.
7. How many employees, and what are their duties?
8. Obtain copies of forms, if any.
9. Remarks.
(5) Power Department
1. Obtain list of equipment, stating number, kind and capacity of engines, boilers, dynamos, pumps, heaters, economizers, traps, condensers, etc., etc.
2. Is equipment kept in thoroughly good condition?
3. How frequently are boilers cleaned?
4. Is there any reserve capacity?
5. Is equipment deficient in any respect? If so, particularize.
6. Are there any special safeguards against accidents?
7. Is the power plant in one unit, or in two or more units? Describe each, if more than one.
8. Is factory heated from central power plant?
9. Is any record kept of power and heat distribution?
10. Is any record kept of light distribution?
11. Is any record kept of air distribution?
12. Is any record kept of engine efficiency?
13. Is any record kept of fuel consumption?
14. Is exhaust steam returned to boilers?
15. How many employees, and what are their duties?
16. Obtain forms.
17. Remarks.
(6) Manufacturing—General
1. Obtain list of articles manufactured, or furnish catalogue.
2. How many plants, and where located? Describe.
3. Are any other plants controlled by the concern? If so, explain relations and how handled.
4. Obtain sketch of floor plans of plant being examined and indicate space occupied by each department. Obtain blueprint if possible.
5. Obtain land area, and how occupied.
6. Is plant owned or rented?
7. Could plant be improved as to arrangement without undue expense?
8. Is any record kept as to maintenance of buildings and machinery?
9. Does such record apply to buildings and machines separately, or is it in bulk?
10. Are there special fire hydrants, standpipes and hose?
11. Are they inspected frequently and kept in good order?
12. Are there any fire-drills?
13. Are there ample fire-escapes and exits?
14. Are they kept clean and readily accessible?
15. Does superintendent appear to be qualified to handle the plant without interference?
16. Is he given full authority, or is his authority limited in any way? Give particulars.
17. Are duties of all foremen and assistants well defined and thoroughly understood?
18. Are departments properly balanced? If not, give reasons.
19. Are there any time-clocks, and are employees supervised when they ring in and out?
20. Are any mechanical devices used for keeping time on jobs? If so, describe.
21. Is there any special system of interdepartment conveyance? If so, describe. If not, or deficient, state improvement necessary or desirable.
22. Is there a good system of shop telephones?
23. Does production consist of standard lines, special orders, or both? State proportion of both.
24. Are orders for standard lines put through for considerable quantities of finished product or for parts to be assembled as wanted?
25. Is there any system of planning work in advance? If so, describe it.
26. How are orders made out and put in work?
27. Are sub-orders or tags made out, or does original shop order follow the work?
28. How are orders numbered or identified?
29. What is the sequence of travel or routing from department to department?
30. Are there any daily reports of progress made? Describe.
31. How is production reported and verified?
32. Are completed orders checked with originals to verify instructions or to compare estimates of time and materials?
33. How are the interdepartment orders handled; i.e., orders for work in form of repairs, or other items not directly concerned with production?
34. How is experimental work handled?
35. Are any parts interchangeable, and to what extent?
36. Is finished product shipped out as completed, or carried in stock?
37. Are individual records kept concerning late and absent time of men?
38. Do they have any strikes or other labor troubles of consequence?
39. How is waste material treated?
40. Obtain forms and books.
41. Remarks.
(7) Manufacturing Departments
Obtain the following information for each department, so far as the questions apply, and supply any additional data necessary to cover requirements fully:
1. Name of department.
2. Name of foreman.
3. Number of employees.
4. How many piece-workers? How many dayworkers?
5. How many non-productive workers? Obtain any desirable information in this connection.
6. Does foreman appear to be competent?
7. Has he any assistants?
8. Are instructions given to workers verbally or in writing?
9. Are blueprints or drawings furnished in all cases where desirable?
10. Obtain list of machines in this department and their uses where name will not clearly indicate their purpose.
11. Mention any that are automatic or semi-automatic, and describe groups operated by one person or team.
12. Are any machines obsolete or inefficient? If so, name them.
13. Are machines arranged to best advantage for economical operation? Suggest improvements.
14. Are there any high-speed machines or tools used? If so, indicate them.
15. Are such machines operated as rated by makers, or have any attempts been made to increase their efficiency?
16. Are there counters on any machines? If so, indicate them and mention other machines where counters would be useful.
17. If tempering or heating furnaces are employed, state for what purpose, what kind of fuel used, and describe operations.
18. Are all machines numbered?
19. Is there a separate tool-room?
20. Are tools numbered or catalogued?
21. Is there a good tool system for checking tools? Describe.
22. Do workmen keep own tools in repair, or is there a toolmaker employed for that purpose?
23. Are machines and transmission appliances guarded to protect employees against accidents?
24. Are there any tool or pattern maintenance records?
25. Are there any efficiency records in connection with either men or machines?
26. What sort of power is employed in this department and how distributed; i. e., by individual motors, group motors, a single motor, or direct from line shaft?
27. Is there any record of power cost either for department as a whole or as applied to machines?
28. Is natural lighting good? If deficient, explain why and—if possible—suggest improvements.
29. Obtain complete list of operations performed in this department, indicating hand and machine work. Describe any that are out of the ordinary.
30. Are operations standardized as to time, machines, speed, tools, etc.?
31. Report on what may be defective methods of performing operations, suggesting improvements where possible.
32. Describe timekeeping system.
33. Is there any lost or idle time? If so, explain why.
34. Is there any bonus or premium system in force?
35. How are materials obtained and charged to production?
36. Is it necessary to issue materials in excess of immediate requirements at times? If so, how is the excess cared for?
37. How is defective work reported and disposed of?
38. Are there any methods in vogue to prevent the replacing of materials that have been spoiled?
39. Do requisitions for replaced material indicate the purpose of the withdrawal?
40. Is there any undue waste of material or time? If so, is there any apparent remedy?
41. How is legitimate waste material disposed of? If used again, describe.
42. Is all work properly tested or inspected?
43. Is work inspected by operation, or only when completed?
44. Are there any delays due to faults of other departments? If so, describe them.
45. Is any attempt made to keep shop in any constant degree of humidity? How is it ventilated?
46. If manner of reporting production or progress in this department differs in any way from others, specify how.
47. How are parts, belonging to repair jobs, stored and marked?
48. Are any samples made for show-rooms, demonstration or salesmen? If so, how handled as to accounting?
49. Is there any friction or dissatisfaction of any sort? If so, explain.
50. Does the department appear to be efficient as a whole, or is there an indication of laxity?
51. Obtain copies of all forms.
52. Remarks.
(8) Repair Department
Examine on same basis as manufacturing departments.
(9) Foundry
Apply same inquiries as used for manufacturing departments as far as they will fit, and, in addition, ascertain various classes of moulding, viz., machine, snap, floor, pit, regular bench, etc., and the various classes of output, the character of mixtures, if mixtures vary in same melt, number of melts per week, cleaning process, manner of making calculations at present, manner of ascertaining production and waste in a steel foundry, whether work is planned in advance, whether flasks, rigging and tools are cared for and placed conveniently for use, whether iron or wooden flasks are used, noting any special methods of moulding, condition of cupolas, furnaces or other equipment, etc.
(10) Plating-room
Same inquiries as for manufacturing departments to be used wherever applicable. Ascertain whether anodes or salts are used and how consumption and amount of deposit is ascertained. Note any special processes, and also quantities of small pieces immersed on one hanger, difficulties encountered, etc.
(n) Wood-working Shops
The same line of investigation as outlined for manufacturing departments should be pursued, bearing in mind that wastes and consumption are the most puzzling features of such departments or plants. Ascertain particularly from an accounting standpoint the methods employed for determining consumption, and the treatment of wastes suitable for further use.
(12) Assembling
1. State fully nature of work performed in this department and methods pursued.
2. If any packing is done here, describe it, and furnish information as under “Packing Department.”
3. How many employees, and how distributed?
4. Does piece or day rate plan prevail?
5. Is work done by individuals or by teams?
6. What record of time is kept?
7. Is department efficient, or otherwise?
8. If otherwise, how can condition be remedied?
9. Are there any machines or mechanical appliances? If so, list them and describe uses.
10. Is any final inspection or test made here?
11. How is the product disposed of after its completion?
12. Obtain copies of all forms and books used.
13. Remarks.
(13) Packing Department
1. What sort of package and packing materials are used?
2. Are packages made or bought?
3. How are packing materials, nails, twine, wire, etc., taken out of stores; i. e., by requisition or otherwise?
4. How are values of above ascertained, and how applied to shipments?
5. Number of employees and their duties.
6. How is time recorded and applied?
7. How are deliveries made to shipping department and how accounted for?
8. Obtain copies of all forms used.
9. Remarks.
(14) Shipping Department
1. How are shipments checked out?
2. What records are kept and what reports are made to general office?
3. Are shipments made from own siding or trucked to railroad stations?
4. How are partial shipments handled?
5. Any mechanical aids?
6. How many employees and their duties?
7. Obtain copies of all forms and books.
8. Remarks.
(15) Sales Division
1. Explain manner of selling product.
2. Amount of sales annually?
3. Are sales evenly distributed over the year, or are they made in seasons? Explain.
4. Are sales classified, and, if so, how?
5. Are any branch warehouses, offices or agencies maintained? If so, describe, and how handled.
6. Any mail order business? Explain plan, if any.
7. Any retail department? Describe how handled.
8. How many salesmen employed—on salary or commission?
9. Any records of salesmen by territory?
10. Any records of profits on sales of each man as above?
11. Are statistics as to sales and salesmen compiled regularly or only at intervals?
12. Any advertising plan? Describe it and the records kept.
13. Describe follow-up system, if any.
14. Describe filing system.
15. Describe freight rate records, if any.
16. Give office force and duties of each.
17. Obtain copies of all forms or books, including route lists, salesmen’s reports, expense accounts, quotation records, etc.
18. Remarks.
(16) General
1. Capital stock? Is it common, preferred, or both?
2. Any unissued or treasury stock?
3. Any bonded, mortgage or other funded debt? State class.

4. Give names of officers or members of firm and their duties.
5. What records are kept by each, aside from those mentioned below?
6. Give heads of departments in general office and their duties.
7. What records, if any, are kept by each?
8. Any friction between officers or heads of divisions? Causes.
9. Any lack of organization or facilities in general office?
10. Mail and correspondence—how handled?
11. Stamps—how handled and controlled?
12. Filing and card index system, and how handled?
13. Divisions, number of employees in each and their duties.
14. Forms and books used in each division, with explanation as to how used.
15. Methods of accounting, including basis of closing, and ascertaining of profit and loss.
16. Classification of accounts, with explanations.
17. Billing system—explain fully.
18. Collection methods and records.
19. Stationery records as to costs and manner of issue.
20. Are any plant, pattern, tool or employees’ records maintained? If so, explain.
21. Pay-roll, how made up? Are receipts taken from employees? Explain with reference to both office and factory.
22. Do manufacturing accounts interlock with general ledger?
23. Is clerical work up to standard and kept up to date?
24. Is there any cost system in operation? If so, obtain full particulars, especially with reference to methods
of distributing shop-burden and general overhead, and method or-routine of collecting and tabulating figures to obtain costs.
25. What objections are offered, if any, against the introduction of improved accounting and efficiency methods?
26. Remarks.
The method employed to record the information obtained from the physical examination of a plant depends entirely upon the individual conducting the examination; but a convenient plan is for the examiner to spend the forenoon of the day in the examination of one or more departments, making notes of the information received, and in the afternoon to write up in detail the result of the examination. Thus it is possible to review the morning’s work while the details are still fresh in mind, and to add any information that may have been overlooked in the first place.

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