Cost Accounting – Special Order System – Productive Labor Method

Introduction
In Chapter XII methods were presented by which the manufacturers’ estimates of the various elements of costs were incorporated in the accounting system for the purpose of showing or proving the accuracy or inaccuracy of these estimates. This method, however, only tests the correctness of the estimates under general divisions, there being no individual proof on the article cost.
In Chapter XIII a step in advance was shown by the departmental system, in that it ascertained the actual costs by classes of product identified with selling classifications. In this, however, as in the estimating system, no provision was made for ascertaining the article cost.
This chapter presents a system by which the article cost may be obtained with a fair degree of accuracy. At the same time it meets the requirements of many manufacturers who wish to dispense with much of the detail in cost keeping. It is probably one of the simplest cost systems which can be used, and under suitable conditions will be found fairly satisfactory. It is not as complete as the systems which follow in respect to ascertaining actual cost; and, while the cost is found on the order or article so far as material and direct labor is concerned, the distribution of the indirect is
made on a percentage based on the entire indirect expenses of the plant, no provision being made for distribution on the basis of departments.
Purchase Requisition (Form 1)
In manufacturing industries where there are maximum and minimum limits to the amount of stock to be carried irrespective of customers’ orders, the purchase requisition may be used by the stock clerk in notifying the purchasing department to order the required amount of goods, unless the stock system is in charge of the purchasing department, when no requisition is required. When the purchasing is guided by the orders received from customers, the purchase requisition may be made out by the clerk in charge of the orders, or by the foreman of a department, or by the superintendent upon receipt of the production order. It may cover only the material required on the particular production order, or it may include estimates of material required for a number of orders. Usually but one copy of the purchase requisition is made, and this is sent to the purchasing department, where it is filed. Conditions, however, may be such that it is advantageous to give duplicate copies to the foreman or superintendent, and in certain cases to the stock clerk as well.
The requisition usually bears a number, and is designed to show the date, the reason for ordering the article, the quantity, description, and the date the goods are wanted. It is signed by the person ordering the goods, and is approved by some one in authority. The date of the order and the purchase order number are filled in by the purchasing department.
Purchase Order (Form 2)
The information appearing on the purchase order will vary with the different conditions of selling. The form is made out in duplicate, the original being sent to the person from whom the goods are ordered, while the duplicate remains in the office.
The particular feature of the form, as it relates to this system, is the caption “Charge To.” This will apply to three different classifications:
(1) Charges to the cost of material purchased for a factory order
(2) Charges to the cost of material purchased for a customer’s order
(3) Charges to the raw stock record
In case goods are to be charged under either of the first two classifications, no material requisition is required. In case they are ordered for stock, it should be so stated under the caption “Charge To,” and a material requisition is necessary to take these goods out of stock and put them in process.
When goods are charged to either a customer’s order or a factory order, the supposition is that they will be used when received; and in such case it is unnecessary to make any record on the raw material stock record. If, however, they go into stock when received, they should be entered on the raw stock record.
Report of Material Received (Form 3)
The original and duplicate copies of this form, after being filled out as to quantity by the receiving clerk, should be sent to the general office. The original goes to the purchasing department and the duplicate to the clerk in charge of the stock or cost records for comparison with the invoice and for entry of the material on the raw stock records or cost sheet, according to whether the material is taken into stock or is immediately used for some particular customer’s order. After the invoice has been checked, it is approved and entered upon the Purchase Journal.
Purchase Journal (Form 6)
The Purchase Journal is a columnar book which serves:
(1) As an analysis for all invoices
(2) As a posting medium to the creditors’ accounts affected
The invoices are entered according to date. Each item of the “Total Amount” column is posted to the credit of the particular creditor’s account, and the total of the column is credited to the Accounts Payable account in the general ledger, which represents a controlling account for all the accounts in the creditors’ ledger, showing in total what the creditors’ ledger shows in detail. The totals of the other columns, with the exception of the last two, are posted to the debit of their respective accounts. The amounts in the last column are posted in detail to the debit of the specific accounts mentioned under the caption “Sundry Accounts.” All the amounts entered in the “Raw Material” column should have been charged in the raw material stock record or the cost sheet, under the caption “Material,” from the report of material received.
Stock Record—Raw Material (Form 10)
The entry in the raw material stock record under the caption “Ordered” should be made when the stock clerk makes out the purchase requisition. The information under the caption “Received” should be taken from the material received sheets, and the information under the caption “Delivered” from the report of material delivered. The costing of the material is made from the report of material received.
Production Order and Cost Sheet (Form 15 a)
This form provides for charging all costs to a particular order number, shows the date wanted and to be completed, and is made out in duplicate. The original, which is purely the production order, is sent to the factory, while the duplicate remains in the office, where the charges for material, labor and overhead are entered upon it. The features of gathering the elements of the cost upon the duplicate copy are explained under the later discussions of cost sheet calculations.*
Material Requisition (Form 19)
This form is made out by the foreman of the operating department when he requires material called for by a production order. The particular style of the form will depend on the class of material used. Where one material requisition embraces all the material on an order, it will not be necessary to use a summary of material delivered; but where the material is taken out on two or more requisitions, the summary of material delivered should be used, and the “Cost” column of the material requisition need not be filled out, the costing in this case being done on the summary of material delivered.
Report of Material Delivered (Form 25)
The “Report of Material Delivered” summarizes the material cost by classification of material and by order number. This is done for the purpose of crediting the raw stock records and charging the cost sheet with the material as it is used on orders.
•”Production Order and Cost Sheet (b),” page 192.

Employees’ Time Report (Form 30)
The main point to bear in mind when designing a time report is to harmonize it with the principles of cost-finding, as applied in the particular system. The form presented herewith is intended to be used with a time stamp, but it is not intended to imply that a form of this character must necessarily be used with the system of cost-finding under consideration. In using the form illustrated, the time should be stamped on the card, the order number entered, and the operation upon which the workman is engaged checked, all operations being printed on the form.
The cost of all the productive labor as shown by the employees’ time reports should be entered on the production order and cost sheets of each order, and also on the pay-roll.
Labor of any other kind, which cannot be charged to a production order, forms part of the indirect expenses and should be entered on the pay-roll form under the caption “Indirect.” Should the labor be in the nature of an asset, such as labor on the construction of a machine to be used for manufacturing purposes in the plant, the time should be charged to a special production order.
Pay-Roll (Form 39)
When a pay-roll of the design shown 1s used, the time records should be summarized and entered on the pay-roll at the end of each week, the entries showing the amount due to the workmen, and the distribution into direct and indirect. “Supervision” is made a separate classification here, although it is also “indirect.” The charges in the column headed “Supervision” are usually for services of the foreman in the operating department, but may also include any other labor charge of this character.
When wages are paid, the amount of pay-roll is entered in the cash book, according to the classification shown in the pay-roll, these classifications being debited in the ledger.
Production Order and Cost Sheet (Form 15 b)
The arrangement of that portion of the production order used for collecting the cost data will depend entirely on the class of business in which the special order system is used. The design shown here is made in duplicate, the original or short copy going to the factory, and the duplicate remaining in the office.
The information under the caption “Material” will come from the report of material received, the material requisition, or the report of material delivered. This will give the material cost of the order. The labor cost is obtained from the time reports, and may be posted directly from these records, according to operation, or may be summarized on a pay-roll analysis and posted in total.
The “Indirect” will be ascertained by adding to the labor cost a fixed percentage to cover indirect expenses. The percentage used in this system is predetermined, based upon the results of past periods, and may be changed at inventory periods, or as conditions warrant.
Stock Record—Finished Product (Form 56)
When all orders are shipped immediately upon completion, it is unnecessary to keep a finished stock record; but where a stock of the finished product is carried on hand the entries under “Production” should be made from the production order and cost sheet, and under “Sold” from the sales record.
It frequently occurs in a special order business that parts which are common to certain styles of product are manufactured and kept in stock, so as to facilitate shipments when orders are received. In all such cases the regular production order and cost sheet should be used, and the regular course pursued.
Bill and Shipping Order (Form 62)
The billing system provides for three copies of the bill and shipping order, which are used as follows:
Original—Serves as a bill which is sent to the customer.
Duplicate—Serves as a shipping order.
Triplicate—Serves as a sales record, being used for posting to the customer’s account. It also provides columns for calculating the cost of the sale.
Credit Certificate (Form 63)
This form is used for returns of goods sold, the selling price being taken from the sales record or the sales sheet, and the cost price from the “Production Order and Cost Sheet.” The original is sent to the customer, and the duplicate remains in the office to act as a posting medium to the accounts. A material received sheet should be made out in all cases where merchandise is returned, showing the actual receipt of all such goods and thereby serving as a voucher for the credit certificate. The merchandise returned should be entered on the finished stock records. In case returned goods are defective, they may be entered on the part-finished stock record until the defects are corrected or until the goods are disposed of as seconds or scrap. The loss in value or the cost of repairs will be charged against the department or account affected.
Register of Sales and Costs (Form 64)
This form provides for registering the sales and distributing the sales price and cost according to sales classifications. Goods returned as shown by the credit certificates should also be entered on a separate sheet of the I register of sales and costs and, at the end of the month, deducted from the totals according to their respective classifications.
The total of the “Accounts Receivable” column should be charged to that account in the general ledger, and the total of the sales columns “A,” “B,” and “C” should be credited to these accounts in the ledger.
The total of the “Cost of Sales” column should be credited to the finished stock account, and the totals of the cost of sales columns “A,” “B,” and “C” should be charged to the sales accounts in the ledger.
Inventory Test (Form 60)
The purpose of the “Inventory Test” is explained in Chapter VII, but a brief reference to it is necessary here, as no system should be operated without a form of this character. Should the inventory test reveal missing stock which cannot be accounted for, an entry should be made crediting the stock records, and charging an account— which might be called “Over, Short, and Damaged Account”—in the ledger. Should the stock records show less stock on hand than is actually found, then the entry would be a debit to the stock records, and a credit to the Over, Short, and Damaged account. The balance of this account forms part of the general operating expenses.
Explanat1on Of Chart And Summary Of Entr1es
Subsidiary Forms and Records
The books and forms used to authorize and record the purchase of materials and supplies, and other expenditures as these are made, are four in number:
(1) The “Purchase Requisition,” which shows the materials and supplies required, and is followed by
(2) The “Purchase Order,” which is sent to the creditor, ordering the necessary materials or supplies.
(3) The “Invoice,” which is checked when received with the purchase order, and also with the report of material received, and is then entered upon
(4) The “Purchase Journal,” which classifies the expenditures, for posting to the controlling accounts affected.
The forms required in recording, receiving, storing and requisitioning raw material are as follows:
(1) “Report of Material Received,” which— after being verified with the purchase order—is entered on
(2) The “Raw Stock Record”—unless the material is entered directly upon the cost sheet of a particular order.
(3) The “Material Requisition,” which shows the raw materials required for a certain order, and may be entered directly upon the cost sheet of a particular order, when same is credited to the raw stock record, or may be recapitulated upon the report of material delivered.
The report of material delivered shows the raw material put into operation, which is credited on the raw stock records, and charged to the cost sheets of the various orders affected.
The forms necessary for the compilation of the cost data are as follows:
(1) The “Cost Sheet,” which is charged with the material put into operation from the “Report of Material Delivered,” as above described, with the labor cost from
(2) The “Time Reports,” and with the indirect expenses which are obtained from a previously prepared
(3) “Schedule Showing the Fixed Percentage” to be added to the labor cost.
The time reports are summarized upon the pay-roll for pay-roll purposes.
When orders are completed they are either transferred to the “Finished Stock Record,” or shipped and billed directly. In case the finished orders are put into stock, entry is made upon the finished stock record. When the orders are shipped and the bill is prepared, entry is made in the “Register of Sales and Costs.” In case the credit certificate shows merchandise returned, entry should be made upon the finished stock record, and also upon the register of sales and costs.
Method of Control
The controlling accounts in this system are all kept in the general ledger, and are as follows:
(1) Raw Material
(2) Direct Labor
(3) Accounts with the items composing the indirect expenses
(4) Overhead
(5) Work in Process
(6) Finished Stock
(7) Accounts with the various sales classifications
(1) The Raw Material account represents in total what is shown by the raw stock records in detail. It is debited with the total purchases of raw material, as shown by the purchase journal, and is credited with any allowances, and with the total raw material which has been requisitioned out, as shown by the report of material delivered, the balance representing the inventory of raw material and agreeing with the detailed raw stock records.
(2) The Direct Labor account is debited from the cash book with the total amount paid for productive labor, and is credited from the summary of the time reports with the total amount distributed and charged to the “Production Order and Cost Sheets.”
(3) The accounts representing the items composing the indirect are debited, either from the purchase journal or cash book, with the amount incurred for each classification, and are credited each month with the balance of the account, unless part of same is to be treated as a deferred charge.
(4) The Overhead account is charged each month, through a journal entry, with the items composing the indirect expenses, and is credited from the schedule showing the fixed overhead percentage with the total amount applied to the various production orders and cost sheets. The balance, if a debit, shows the undistributed portion of the overhead, which means that the fixed percentage added to the labor cost was not sufficient to cover the indirect expenses. When there is a credit balance, however, it shows that the percentage allowed was more than sufficient. In either event, the percentage to be used for the next period should be adjusted in accordance with the information thus disclosed.
(5) The Work in Process account is debited with the total amounts that have been credited to the raw material, direct labor and overhead accounts, and is credited from the summary of finished orders with the total cost of the orders that have been completed, when these are either transferred to finished stock or shipped. The balance represents the total amount of work in process, and should agree with the total production orders and cost sheets not completed.
(6) Finished Stock account is debited from the summary of finished orders with the total cost of completed orders, and is credited from the register of sales and costs with the total cost of the sales, the balance being the inventory of finished stock. It represents in total what is shown in detail by the finished stock records.
(7) Sales accounts should be kept with each classification of the product, and should be debited with the total cost of the sales when same is credited to the Finished Stock account. The accounts are credited with the total selling price of the sales when same is debited to the Accounts Receivable account. The balance, if a debit, represents the gross loss, and, if a credit, the gross profit.
Profit and Loss Statement (Form 68)
The “Profit and Loss Statement” is prepared from the ledger accounts. The departments represent the classifications of the product according to selling departments. The information for the first three columns is obtained from the sales account of each selling department. The selling and administrative expenses may be distributed over the various departments on some arbitrary basis, according to the amount of sales, cost of sales, or gross profit that each department bears to the total of all departments. If, however, some of the items composing the selling and administrative expenses can be localized and charged to a specific department, this should be done. In such case the results will be more accurate, because the total to be distributed arbitrarily has been lessened. Balance Sheet (Form 69)
The balance sheet is also prepared from the accounts in the general ledger. In addition to showing the financial condition at the end of the month, it shows the increases or decreases of each item as compared with the previous period.