Cost Accounting – Product System – Machine Method
PRODUCT SYSTEM BASED ON
THE MACHINE OR PROCESS METHOD
This system is similar in some respects to that described in Chapter XV, so far as it relates to the machine or process method, the principal difference being that this is a product system, whereas the other is a special order system. Also its final costs are collated on a separate cost record, instead of on the production order and cost sheet. The present system is effective in factories where a standard line is manufactured, and where the operations are well defined in their relation to the product.
The operating hours, together with the costs relating to the machine or process, form the basis of the plan as described; but the basis need not necessarily be time, as this is not always practical. The total number of pounds or tons, or any other unit of measure, may be used, and the cost per unit for each operation ascertained. That is, the basis of a system of this kind may be either time, showing the cost per hour, or quantity, showing the cost per unit of measure.
The purchase requisition, purchase order, accounts payable voucher, register of accounts payable, report of material received, and raw stock record are the same in design for this system as for the systems previously described.
Production Order (Form 14)
The production order illustrated in this system may also be used as a material requisition; and for that reason the material requisition and its summary are omitted from the forms described.
Another plan which may be followed where the product is absolutely standard is the use of an ordinary production order, in connection with a bill of material (such as shown in Form 22) instead of the material requisition.
The postings to the raw material records for material used can be made either from the production order or from the bill of material, depending on which is the more convenient; and the total cost of the material is charged on the cost records against the manufactured article or product for which the material was used.
Employees’ Time Report (Form 27)
The time reports provide for the registering of production according to operation, and are applicable where the operator works on a machine, the labor cost being charged to the machine or process according to the production order number. In cases where the process cannot be identified with a particular order number, the time should be charged against the process and the name of the product.
The time reports should be summarized daily for entry on the pay-roll, and should be summarized weekly on the analysis of pay-roll.
Pay-Roll (Form 40)
This form is an ordinary record, used for pay-roll purposes only. It is designed so that the earnings of each employee may be entered daily.
Analysis of Pay-Roll (Form 36)
This form is used for analyzing the time records, and shows the productive labor according to time, operations, department, and order number or product classification. The total labor cost is entered on the process card according to department and operation, and the total labor time, classified according to the various operations, is entered on the cost sheet of the article or order chargeable.
Analysis of Factory Expenditures (Form 41)
The “Analysis of Factory Expenditures” is made out from the accounts representing the indirect expenses which are kept in the factory ledger. Its purpose is to allocate the different items to their proper departments. Those classifications of the indirect expenses which cannot be charged to any particular department, or are not distributed to the process card records or power cost and distribution records of the various machines, may be summarized on this form and prorated over the various operating departments on the basis of productive labor cost, or productive labor hours.
Forms for Applying Costs
Process Card Record (Form 45)
Power Cost and Distribution (Form 46)
These forms are described fully in Chapter XV.
Production Report (Form 50)
This form should be made out daily or weekly (as the conditions in the plant may require) by each operating department according to order number or class of product. It shows the total production of each operating department according to operations.
The form also provides for costing the material of the production, the information being taken from either the factory order or the bill of material, if one is in use.
The total production for each operation is transferred at the end of the month to the cost sheet, under the caption “Production,” according to the article produced, and is entered in the proper column showing the production, according to operation or department.
Cost Sheet (Form 53)
This form is intended to be the final cost record of production. The costs may be kept by article or by product, a separate sheet being used for each classification.
The information under the caption “Production” and “Quantity” is taken, according to operations or departments, from the production report. The information under the caption “Hours” and “Minutes,” is obtained from the analysis of pay-roll, according to operations.
The process rate per hour is obtained from the process card record. By multiplying the number of hours by the rate per hour, the process cost will be shown. The material cost will then be entered from the production order, and the total cost of the production shown. As these records are intended to be compiled departmentally, i. e., by operating department, they should be summarized on the same form to obtain the complete cost of the production, which will then be transferred to the stock sheets of finished product.
Other Forms Employed
The following forms which have alreadv been described are necessary to complete the system:
Finished Stock Record (Form 59)
Part-Finished Stock (Form 56)
Inventory Test (Form 60)
Sales Sheet (Form 62)
Credit Certificate (Form 63)
Register of Sales and Costs (Form 64)
Profit and Loss Statement (Form 68)
Balance Sheet (Form 69)
Explanat1on Of Chart And Summary Of Entr1es
Subsidiary Forms and Records
The purchase requisition, purchase order, invoice, accounts payable voucher, register of accounts payable, report of material received, and raw stock record are used in the same manner as in the preceding system for the purpose of showing the authorization, purchase, receiving and storing of material and supplies, and the incurring of other expenditures.
The subsidiary records used for compiling the cost data are as follows:
(1) Production Order and Material Requisition
(2) Time Reports
(3) Analysis of Pay-Roil
(4) Analysis of Factory Expenditures
(5) Power Costs and Distribution
(6) Process Card Record
(7) Production Report
(8) Cost Sheet
The information upon the production order and material requisition is transferred to the cost sheet to show the cost of material going into process. The supplies are transferred either to the power costs and distribution or the process card record.
The time reports are entered upon the pay-roll for payroll purposes, and the analysis of the pay-roll is then attached to the accounts payable voucher for entry upon the register of accounts payable. The time reports are also entered upon the analysis of pay-roll, from which the information goes to either the power costs and distribution sheet or the process card record. The productive labor time is entered upon the cost sheets.
The information upon the analysis of factory expenditures is transferred either to the process card records or to the power costs and distribution record, and after the power costs are distributed and entered upon the process card records, the information upon the process card records is transferred to the cost sheets.
The production report shows the amount of production, which is transferred to the cost sheets.
It will be seen that the cost sheet summarizes the elements of costs and production as follows:
(a) Material cost, from the production order
(b) The cost of productive labor and indirect expense, from the process card records
(c) The productive labor time on the article, from the analysis of pay-roll
(d) The quantity of the production, from the production report
The method of recording information relative to the transfer of finished articles and finished parts to the stock records, and also the method of transferring part-finished stock back into operation to be completed, has already been described. The method of recording shipments and sale of finished stock and part-finished stock, and also of any return of stock, has likewise been described.
Method of Control
The method of control of the cost records by the financial records is the same as used in the previous system, the general ledger accounts affected being the same. The accounts which are kept in the factory ledger are as follows: (1) Raw Material and Supplies
(2) Direct Labor
(3) Accounts with the items composing the indirect expenses
(4) Power Cost
(5) Process Cost
(6) Work in Process
(7) Part-Finished Stock
(8) Finished Stock
(9) General ledger
(1) The Raw Material account is debited from the register of accounts payable with the total purchases, and is credited with allowances and with the total raw material and supplies delivered to operating departments, as per the production order summary. This summary shows the total material charged against the various articles upon the cost sheets, as per the summary of material requisitions, which in turn shows the supplies delivered and chargeable to the various machines and processes. The balance of the Raw Material account should agree with the total balances of the detailed stock records which represent 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 analysis of pay-roll summary with the distribution of direct labor, when same is chargeable either to Power Cost or Process Cost account.
(3) The accounts representing the items of indirect expense are debited from the register of accounts payable with the amount of expenditures incurred, and are credited from the analysis of factory expenditures when expenditures are charged either to the Power Cost or Process Cost accounts.
(4) The Power Cost account is debited with
(a) The total supplies chargeable, as per summary of material requisitions
(b) The total direct labor chargeable, as per the analysis of pay-roll summary
(c) The total indirect expenses chargeable, as per the analysis of factory expenditures
The Power Cost account is credited with the distribution of the power cost when same is charged to the process cost account.
(5) The Process Cost account is debited with
(a) The total supplies chargeable, as per summary of material requisitions
(b) The total direct labor chargeable, as per analysis of pay -roll summary
(c) The total indirect expenses chargeable, as per analysis of factory expenditures
(d) The total cost of the power distributed, as per the power costs and distribution summary
The Process Cost account is credited with the total cost of the labor and indirect expenses distributed, chargeable to the Work in Process account.
(6) The Work in Process account is debited with
(a) The total cost of the material, as per the production order summary
(b) The process costs, as per the process card record summary
(c) The total cost of part-finished stock which has been put into operation to be completed
The Work in Process account is credited from the summary of cost sheets with the total costs of part-finished stock and finished stock when these are debited to the proper account. The balance of the Work in Process account should agree with the total balance of the cost sheets for the articles or product still in process, and represents the inventory of the work in process.
The Part-Finished Stock, Finished Stock and General Ledger accounts are kept in the same manner as in the previous system and need no further explanation.
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