The departmental cost system is the next step in advance upon the estimating system last described. In both systems the class of product is the unit on which costs are based, the difference being that in the estimating system the costs are estimated and verified at the inventory periods, while in the departmental system they are not estimated, but are determined either at inventory periods or by compiling the costs monthly. It must be kept in mind that the word “Department” in this system does not refer to factory departments, but to departments or divisions of finished stock, as men’s shoes, women’s shoes, children’s shoes, etc. To avoid confusion, the term “Operating Department” will be used when reference is made to the divisions in the processes of manufacture.
Scope of the Departmental System
A departmental system is not supposed to do the work of a complete system; but manufacturers often object to the extra work and clerical help necessary to operate a complete system, and for that reason provision has been made for the more elementary methods of finding costs exemplified by the departmental system. As a rule the results are satisfactory; and where they are not, the elementary methods of the system are sufficient to show the cause, and often indicate along what lines a complete system should be conducted. It is not to be expected that a departmental system will perform all the organization and efficiency functions that are provided for in complete system work.
Conditions Where Applicable
It should be clearly understood that a system of this character is only applicable to those plants where the production order may be made to cover a distinct class of product which is to be identified with the selling classification in finished product. This principle must apply to every operating department of the plant. In some factories one or more operating departments manufacture product which cannot be identified clearly with the selling classifications until it has reached the final stages, or can be identified only in the finishing and assembling departments. In such cases a departmental system will not be practical unless it is supplemented by a different system used in the beginning processes of manufacture, and based on the unit of production. Even then it would be preferable to use one of the complete systems, as under such conditions the departmental plan loses the simplicity which is the chief point in its favor.
Methods and Principles
The principles and methods of the departmental system may be outlined as follows:
(1) The costs are to be found on the different classes of product as units. No distinction is made between different articles or kinds of articles belonging to the same class and only incidental attention is given to operating department costs.
(2) The unit of time chosen is the inventory period. The accuracy of the calculated costs is checked up and adjusted by means of the beginning and ending inventories.
(3) All material taken from the storeroom is recorded and classified according to its use in the various classes of product.
(4) The cost of direct labor is classified in the same way. and the distinction between direct and indirect labor is definitely fixed.
(5) The total indirect expenses are computed from the various accounts, and are distributed over the departments of product as units. The only basis of distribution provided for in the system is the direct labor cost. If any other basis is required to meet a particular condition, the system should be amplified, and special arrangements made for collecting the necessary data.
(6) The sales made during the period are classified according to the classes of product, so that the gross profit or loss for each department may be determined.
(7) The selling and administrative expenses are prorated over the different departments on some arbitrary basis, and the net profits or losses for each determined accordingly.
(8) The proper accounts must be opened in the ledger to classify and summarize the data according to the foregoing plan of operation.
Six forms are ordinarily used in the departmental system, viz.:
(1) Purchase Journal
(2) Factory Order
(3) Bill of Material
(4) Time Report
(5) Analysis of Pay-Roil
(6) Register of Sales
While the forms described in this system are limited to the number specified above, it does not mean that organization and efficiency forms described in other systems may not be used in a departmental system. Only the forms actually necessary are described here.
Purchase Journal (Form 6)
A simple form of purchase journal is used to good advantage in a departmental system. At the end of each month the party from whom goods and supplies are purchased is credited, and the totals of the raw material and other classifications named at the top of the purchase journal columns are debited. An account with raw material is kept in the ledger, and the material used is requisitioned out through a bill of material, according to classification of product.
All indirect expenses which are general in character are entered in the purchase journal under the captions “Supplies,” “Repairs and Maintenance,” “Insurance, Taxes and Rent,” “Factory Expenses,” etc., but wherever it is possible to charge factory indirect expenses of any kind against a classification of product, these items should be entered under “Sundry Accounts” according to the department affected, and should be posted directly to those department accounts.
Factory Order (Form 13)
The “Factory” or “Production” order is simple in design, and shows no costs on its face. It is the key, however, to the analysis of costs on the bill of material and time reports. A single order may be issued for different articles belonging to the same class, but the same order should never include articles of different classes. The order number and bill of material number specified on the order serve to identify the class; and all costs arising in connection with a particular order are at once identified by the classification number.
Bill of Material (Form 23)
A bill of material should be made out for every article manufactured. A material requisition will only be necessary for special orders outside the usual routine. The prices should be revised or new bills made out whenever there is a change in the cost of materials issued. The bill of material may be so devised that it will also serve as a receipt for material actually delivered under that bill, and the summary may be shown at the bottom of the sheet.
The total amount of each bill of material is credited to the Raw Material account, which has previously been charged with the beginning inventory, and with all material purchases made since.
Time Report (Form 26)
A “Time Report” or piece-work report that will apply to the conditions should be used. This report should show the classification of the product, the nature of the work, the time consumed, and, if practicable, the number of articles produced. The rate and amount columns are filled in and transferred to the “Analysis of Pay-Roil,” the classification being made by means of the classification number.
Analysis of Pay-Roll (Form 35)
The “Analysis of Pay-Roll” may be used as the regular pay-roll if desired. The time or piece-work reports furnish the information, which is entered for each day of the week, and totaled for each pay-day. The distribution is made over the various classifications by means of the classification number.
In making the distribution by classes of product, it should be noted that certain forms of labor commonly reckoned as indirect, can often be identified with certain classes of the product. To illustrate, a foreman or inspector may spend all his time in an operating department where there are only one or two classes of product operated on. While his work cannot be identified with any particular articles, it belongs strictly to the class or classes as a whole; and it would be a mistake to put such labor with the other indirect expenses and distribute it over all the departments. Labor costs that can be so identified decrease the amount of indirect expenses and increase the accuracy of the costs correspondingly.
When the pay-roll check is drawn, it should be charged in total to the Pay-Roil account in the ledger. When the amounts distributed on the analysis of pay-roll are charged against the respective department accounts and indirect labor, the Pay-Roil account in the ledger is credited.
Register of Sales
Where the sales are posted direct from the invoice, a form or book should be used for analyzing them into classifications of product.
Another method is illustrated by Form 64, where the sales are entered on a register, and columns are added for the classifications; but in this case the sales classifications only are provided for, the cost of sales being omitted.
At the end of the month, after all postings charging customers’ accounts have been made, the total of the sales is charged to an Accounts Receivable account; and the department columns are credited to the Department Sales account in the ledger.
When the system is first put in operation, department accounts are opened in the ledger according to the classifications of product. When the inventory is taken, it should be classified by departments so far as goods in process and finished stock are concerned, and should be debited to the respective department accounts in the ledger.
The department accounts are also charged with all material taken into process of manufacture, the information being taken from the bill of material.
The labor cost chargeable to each department is taken from the analysis of pay-roll. At the end of the inventory period the total charges of the indirect expense account are distributed over the various departments on the basis of direct labor charged to each. As stated in the beginning, other methods of distribution can be used if provision is made for gathering the proper data, as for instance, the number of hours devoted by all the men to articles in each class of product, which might be taken from the time reports and be compiled on a special record. When the distribution is made, the indirect expense accounts are credited with the total amount.
At the end of the fiscal period the inventory is taken in the same manner as the beginning inventory and credited to the department accounts.
The balance of these accounts will represent the cost of the goods that have been shipped; and this balance should be transferred to the debit of the Department Sales account, this account then showing the gross profit or loss.
The selling and administrative expenses are then prorated and charged to the Department Sales accounts, the balance of these accounts showing the actual net profit or loss.
Work in Process Method
Another form of departmental system is based on the keeping of a “Work in Process” account in the ledger. Where this account is kept the inventory at the beginning of the period is classified according to raw material, work in process and finished stock, and these three accounts in the ledger charged according to the inventory classification. The charges to the “Work in Process” account are taken from (1) the bill of material for raw material put in process, (2) the analysis of pay-roll for labor, and (3) the total of the indirect expense accounts.
At the end of each month the “Work in Process” account is credited with the material, labor and indirect expense, from the “Production Report of Finished Goods,” which should be devised to show material, labor and indirect costs. At the same time the Finished Stock account is charged. The balance of the “Work in Process” account will then show the value of the work in process.
As sales are made they are credited to the Finished Stock account at cost, and charged to the department sales accounts in the ledger, these accounts being credited with the sales according to the proper classification. The balances of these accounts show the gross profit or loss.
When the actual inventory is taken, it should agree with the three classifications of inventory accounts in the ledger, viz.:
Work in process
If any discrepancies exist between the theoretical and actual inventory, the difference will have to be distributed on some basis, to the debit or the credit of the department accounts, as the case may be.
Under this plan a monthly profit and loss statement may be taken from the books, the accuracy of which will depend on the accuracy of the factory reports.
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