Co-operation of Management and Employees
After the plant has been thoroughly examined, and all the information has been classified according to the different phases of cost-finding, the next problem is to devise a system that will perform its twofold function and at the same time be practical in its workings. There are often many conditions outside of the manufacturing part of the plant that have an important bearing on the situation. Not least among these is the disposition of the manufacturer himself and his assistants. It is next to useless to try to install a system that is going to be regarded with suspicion and criticism before it has had a chance to prove its worth. To get the best results the co-operation of the whole force is needed.
The foremen and department heads are often the most persistent objectors, as they are likely to regard the installation of a cost system as an invasion of their territory. They are right to the extent that the system provides an effective means of examining their work and measuring their efficiency, in a way that cannot be done by personal inspection. The usual shortcomings of a foreman are to be found in his failure to plan ahead properly and lay out work for the men under him, and the time reports will show his deficiencies in this respect. To illustrate, the time-clock cards may show that the men were present 900 hours during a week, while the time reports, which indicate the time spent on jobs, may show only 800 hours for the same week. Under a cost system this cross-checking of time records should never be omitted; and if a difference exists, the foreman should be called upon to explain the discrepancy.
Fitting the System to Existing Conditions
Much depends on whether the employer is willing to engage a special cost clerk or not. If the work is to be undertaken by the regular office force, the system must be one they can handle; and this involves a very simple system when the office clerks are not particularly capable. More will be accomplished by generalizing results in such cases than by putting in a complete system, which is bound to break down because the clerical force cannot handle it.
In other words, the cost accountant must work along the lines of least resistance, and begin with as simple a system as possible, amplifying this and adding new features as the conditions allow. This is the reason for introducing at first an “Estimating” system, which will serve its own purpose and also soon show where more complete methods should be applied. The size of the plant and complexity of the work will of course have some influence on the system, both in the beginning and during its growth. It cannot be hoped that an elementary installation will give satisfactory results where there are many varieties of articles manufactured, or where the processes are numerous or involved.
The growth of a system is not necessarily toward complexity. Very often, after a factory is well organized and the efficiency work of the cost system beginning to show results, features that were at first treated separately may be included in larger units, and much detail labor avoided. The system at first must fit existing conditions; but one of the objects in view is to change conditions for the better, and when this is done the system itself may be changed accordingly. There are conditions, too, that remain comparatively constant from year to year; and when a cost system has obtained the results by detailed methods for one or two years, that part of the system may be dropped and the results considered as a constant quantity. There is little benefit in verifying established data, especially if the verification is involved or expensive and can be accomplished approximately by other means.
Whatever kind of system is devised, every precaution should be taken to avoid making it top-heavy. If there is one thing more than another that excites criticism, it is “red tape” that does not justify itself in practical results. It may show itself in a mass of undigested reports, troublesome to make up in the shop and impracticable to use in the office, or it may take the form of volumes of data that no one ever looks at. Another form of red tape, not uncommon, is carrying small items of cost to such a degree that the process of determining them is more expensive than the costs themselves.
In avoiding these pitfalls, the cost expert will sometimes appear to be violating the fundamental principles of costfinding, when, as a matter of fact, he is only preventing them from going to seed. The last point will bear illustration. In manufacturing straw hats the material costs appear under five heads: the braid or straw, the band, the sweat—which is the leather inside—the trimmings, and the thread. Under a special order system the only practical way to treat the thread is to put it in the general indirect expenses and distribute it over the hats without regard to their grade or value. The expense of finding the cost of the thread entering into any particular grade of hats would be greater than the cost of the thread itself. Similar instances can be cited in many industries.
Reports for Executives
The systematizer must keep in mind what the practical objects and purposes of the cost system really are. The system itself is not the result; it is only the means by which results are obtained.
If the cost system is to be the measure of shop efficiency, thought will have to be given to the form in which the results should appear. The record to be used to show these final results is the comparative analytical statement prepared at the end of every cost period, in which the expenses are classified. The comparison may be made by parallel columns or by comparing different sheets. Sometimes the various expenses are plotted on charts so as to show at a glance the upward or downward tendency. The completeness of the classification depends upon the completeness of the system, and, as stated before, this depends on a number of considerations. The idea is that the manager should be able to put his finger on any variations in any item of expense relating to any class of goods or to any department, and either know the cause or be able to investigate and discover it. Not only can variations be studied, but each item may be considered by itself with the idea of applying a remedy if needed. In short, an adequate report of cost results serves as the key to the whole situation, giving the management positive knowledge of the facts as they are.
One feature that must be decided before actual arrangements are made for installing a system is the cost period. This is the unit of time for which costs are to be summarized and reported, and usually covers a month. It is advisable to have the cost period coincide with the pay-roll periods as far as practicable, so that the closing days will agree; that is, if the men are paid by the week, the cost period may be four or five weeks. In this way calculation of wages due but not yet paid will be avoided, and the distribution of costs simplified.
General Outline of Systems
The systems described in the following chapters have been selected with the idea of illustrating the principles of cost accounting applied to the general types of systems outlined in Chapter IV. As far as possible, the systems have been made general rather than specific, in order to provide for flexibility in adapting them to actual conditions. In any particular case the system adopted will probably require some modification, which, while not affecting its general plan, will apply its principles in a different way. The aim in each instance must be to make the system practical in its operation. Much of the opposition and criticism that cost systems have incurred is due to too much enthusiasm and too little common sense in their planning. The system has been placed ahead of the business.
There is nothing presented in these chapters, in the way of either methods or designs, that has not met with success in actual operation. They do not merely represent what might be accomplished, but what really has been done.
Estimating Cost Systems
In Chapter XII is presented a graded series of “Primary” or “Estimating” cost systems, which will locate the causes of faulty or erroneous estimates. Besides having obvious values of its own, an estimating system will indicate along what lines a more detailed cost system should be applied, if that is desirable. As an efficiency agent, however, the estimating system is of little use, since it does not provide for reporting the work of the shop in detail.
In Chapter XIII methods of finding the cost of different classes of product by the class are described under the title “Departmental System,” the word “Departmental” referring to the classification of product, and not to the operating department. It is an intermediate step between the primary or estimating and the complete cost system. The costs of a particular class are found, but are not analyzed beyond the principal divisions. Under such a system the danger is that some articles of a class may be manufactured at a loss, and the loss be concealed by the profit on other articles of the same class, while the class as a whole shows a profit. When the classification is simple in character, however, a departmental system may often be used to great advantage, since much of the detail work of a complete system is eliminated.
Special Order and Product Systems
The four systems described in Chapters XIV to XVII inclusive illustrate in each case one of the four general types referred to in Chapter IV. The descriptions themselves are given from an accounting standpoint, since the system of accounts is the key to the system of operations. The conditions to which each system applies are outlined at the beginning of the chapter in which the particular system is described.
To avoid confusion, only two methods of distributing the indirect expenses have been used, the direct labor cost and new machine rate. Each method is given in connection with both a “Special Order System” and a “Product System.” If the principles are well understood, there should be little difficulty in changing the forms and classification of accounts, so as to provide for any other method of expense distribution.
Attention should be called to the necessity which often exists of combining different methods in the same plant. For instance, in either a stove works or a tannery the first few operations are best covered by a product system, while at a certain stage the manufacture breaks off abruptly into what is essentially a special order business. There are also many instances where part of a plant must employ a productive labor method, while the rest can only be treated rationally by machine rates. Such cases, especially the former, call for considerable ingenuity in welding the two systems of cost accounts into one without loading it with extra details.
In presenting the four cost systems, no attempt has been made to include all the organization forms, some of which are essential for a cost-finding system conducted on a systematic basis. The systems as presented are intended to illustrate, as far as possible and without too great detail, the best methods for compiling the cost data intelligently and accurately and interlocking the cost accounts with the general books.
In explaining and describing the forms for gathering and compiling the cost data in the different systems, some repetition has been unavoidable in explaining the application of the same principles or forms under different conditions. Where such repetition occurs, it is only for the purpose of making the matter clear without too frequent reference to other parts of the book.
Charts of Cost Systems
The charts of the four cost systems, which appear in connection with the descriptions of these systems, are designed to show in concise form the course of the entries on all records and accounts affected. These charts, in connection with the explanations of the forms and records, give a clearer and more comprehensive understanding of the detailed workings of the system than could be obtained otherwise.
The charts are each divided into three main divisions, showing:
(1) A general description and classification of the entries which affect both the subsidiary and the controlling records
(2) The course of the entries on the subsidiary forms and records
(3) The method of control, and the entries affecting the controlling records
General Description of Entries
The entries of a cost system may be classified under six divisions:
(1) Authorizing the purchase of materials and supplies, and the incurring of other expenditures
(2) Receiving, storing and requisitioning of raw material and supplies
(3) Putting raw material into operation
(4) The compilation of cost data on the cost sheet
(5) The transfer of finished parts or finished stock to their respective stock records, and also the transfer of part-finished stock back into operation to be completed
(6) The shipment and sale of finished stock or part-finished stock, and also the return of finished
stock or part-finished stock, including the entries
upon the register of sales and costs
By means of these six classifications, one can very readily see:
(1) The detail records affected
(2) The controlling accounts affected
The subsidiary records on the charts are represented by rectangles upon which are entered the names of these records and also their numbers.
The course of the entries upon the subsidiary records is denoted by means of arrows which show:
(1) The source from which the information is obtained; and
(2) The disposition of the information
Method of Control
The division of the charts on which appears the method of control of the subsidiary records is classified so as to show the posting medium, the factory ledger accounts affected— if a factory ledger is used—and the general ledger accounts affected.
Under the caption “Posting Medium,” those records are mentioned from which postings to the factory ledger and general accounts may be made. It should be borne in mind, however, that the entries affecting the factory ledger may be entered in a cost journal, and postings may then be made from that source.
Under the captions showing the accounts affected the entries are in journal entry form. Forms and Designs
When it comes to the question of choosing or designing the forms to be used in any particular case, it is impossible to exercise too great care and foresight. The matter is one that cuts deeper than is apparent at the first glance. Fundamentally, a form is determined by the question, “What do I want to know?” Not only the form but the system to be adopted depends on the answer to this question. The next question is, “How can the facts best be obtained, summarized and arranged, so as to get the most out of them with the least trouble and expense?”
This cannot be answered until the type of system to be installed has been decided upon. The whole system should be arranged so that its several parts will fit in the scheme naturally and conveniently.
Forms have not been provided in all cases for summarizing purposes. In many cases this may be done on the form upon which the original data is compiled, and where this is not practicable, blank paper with ruled columns will answer the purpose.
The forms for gathering the data at first hand should be designed with the idea of getting the necessary information with the least disturbance to the workmen and to shop routine consistent with accuracy.
Forms, as a whole, may be arranged so that they may be used for more than one purpose. For instance, the material requisition sheet is customarily made out to show the amount and cost of material entering into any given production order, but the information recorded there may be just the information needed in connection with keeping a stock record. This double purpose of the form is accomplished either by making the form more general or inclusive in design, or by making extra copies. In actual practice the scope of forms is limited by their respective uses. That is, the same data should not be collected over and over again. The forms as described in this book overlap because it is necessary to show what uses can be made of each form— not what uses should be made.
The forms submitted are limited in number; and with this in mind, they have been carefully selected rather as suggestions to work from, than as examples from which to choose.
A careful inspection and comparison of related forms will often suggest the minor changes necessary to adapt them to other kinds of systems. Adding a new column or changing the classifications will often enlarge the scope of a form more than would seem possible.
No attempt has been made to explain completely all the functions that each design could perform, the object being to cover only the main functions it performs in the system under consideration. Wherever more information is desired as to the general use and purpose of any particular form than is given in the system described, reference should be made to the chapters relating to the recording and compiling of the cost data.*
The forms presented in Chapters XVIII to XXII, inclusive, are also supplied under separate binding, so that the reader may have them conveniently before him when they are to be consulted in connection with the text.
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