Methods of Controlling Cost Records
The description and analysis of the financial records as a whole is a subject for special books; but since the cost records are practically an analysis of an account or accounts appearing in the financial records, it is necessary to consider the accounts which are affected. In a complete cost system the cost records may be controlled and interlocked with the financial records in one of two ways:
(1) Accounts may be kept in the general ledger, which should control the various items of production cost in its various stages. For instance, accounts should be kept with material, labor and indirect expenses, work in process, and part-finished and finished stock, entries being made to these accounts in the same manner as if they were kept in the factory ledger.
(2) An account styled the “Factory Ledger Account” may be kept in this general ledger. This account represents in total what is shown in detail by the factory or cost records, and the balance is usually a debit, agreeing with the credit balance of the General or Private Ledger account in the factory ledger. The Factory Ledger account is debited with all charges to the factory, as represented by the total of the factory ledger column in the register of accounts payable, the details of which are analyzed in the factory ledger accounts. The Factory Ledger account is credited with the total cost of sales as shown by the register of sales and costs, when this is debited to the Sales account.
The sales accounts may be divided or classified according to departments—departments here meaning divisions of the articles sold. They are debited with the cost of merchandise sold at the time this cost is credited to the Factory Ledger account. They are credited with the total amount of the sales—less returns—as obtained from the register of sales and costs, at the time this cost is charged to the Accounts Receivable controlling account. The balances of the sales accounts represent the gross profit or loss upon each different classification of the sales.
A single account may be kept embracing all selling expenses, and this account may be analyzed at the end of the cost period; but it may also be well, where practicable, to keep separate accounts showing the selling expenses for each classification of the sales accounts. Part of the advertising, commissions, salaries, etc., can be related directly to certain classes of product; and these products should always bear such expenses. The expenses that cannot be so charged may be kept in a General Selling Expense account, and apportioned over the classified accounts on some arbitrary basis, such as the cost of sales, or the volume of business done. If there is a balance in the General Selling Expense account, it is generally a debit, and may represent a deferred charge—that is, a certain amount of selling expense in curred but not yet distributed, for the reason that it is chargeable to future operations of the business.
Separate accounts are usually kept for each class of selling expense, to show the amounts spent for each item. Each account should be charged with the amount spent, and credited with deductions for any allowances made, and with the amount distributed to the Profit and Loss accounts.
Attention is called to the fact that the distinction between administrative expenses and production costs on the one hand, and selling expenses on the other, may be an artificial one only, as in many cases the administrative expenses are incurred through action or effort that may be in the interest of either production or selling. Therefore it should be borne in mind that any expenses that affect either the manufacturing or selling departments should be charged, wherever practicable, to the proper classification in the department affected. Some of the items usually listed as administrative expenses are as follows:
Salaries of officers
‘Salaries of office clerks
Rent of offices
Light and heat of offices
Telegraph and telephone
Stationery and printing
Car fares and incidentals
These accounts are charged with the expenses incurred, and credited with any allowances. The balance may be distributed over the various classifications of the sales upon some such basis as used in the distribution of the selling expenses.
Monthly Profit and Loss Statement (Form 68)
The nature and size of the business, as well as the scope and type of the accounting system, will largely determine the nature of the profit and loss statement to be prepared. It may deal only with the totals of the various departments or classes of product, showing the sales, cost of sales, gross profit, selling expenses, administrative expenses, and net profit or loss; or, on the other hand, it may be prepared so as to disclose the details of the cost elements, selling expenses and administrative expenses, together with various percentages which are of value for comparative purposes.
All records, including both the financial and cost accounts, should be arranged so as to facilitate the preparation of statements.
All information called for by the profit and loss statement may be obtained from the private or general ledger. Under the caption “Departments” will be shown the classification of the various selling products. Under the caption “Sales” in the statement of profit and loss will be entered the total debit and credit of the departmental accounts; under the sub-caption “Amount” the sales; and under the sub-caption “Costs” the cost of the sales, this cost being made up of the complete factory cost of the product, including all indirect expenses. Under the caption “Gross Profit” is entered the difference between the amount of the sales and the costs, as shown, in the private or general ledger. Under the caption “Expenses” the totals of the selling and of the administrative expenses should be entered, at the bottom of the page, in their proper columns. These totals may then be prorated over the different departments on the basis of the percentage of the cost of the sales, and the amount to be charged to each department entered in the proper position in its column. Under the sub-caption “Total” is shown the total of the two classifications of expenses; and under the caption “Net Profit” is shown the net profit or loss of each selling department, obtained by deducting the total expenses from the gross profit. In the last column are shown the percentages of net profit in each department.
The preparation of this statement from the private or general ledger, at the end of the month, will be merely a matter of copying off the balances of the departmental accounts, and distributing the balances of the expense accounts.
This statement gives a summary of all the transactions of the business for each month, and represents the final outcome of all factory operations that affect the cost of goods sold during the month.
It should be borne in mind that every figure appearing on this statement is supported by other references; and any figures shown in the “Net Profit” column which are not satisfactory to the management may be investigated, the cause of any loss in percentage shown, the reason ascertained, and the remedy applied.
Balance Sheet (Form 69)
The balance sheet is the statement which shows the financial status of an enterprise, and is prepared monthly from the accounts in the general or private ledger. Under the caption “Current Month” is stated the balance of the
account for the month in question, and under the caption “Increase or Decrease” is shown the increase or decrease from the balance of the preceding month.
One of the most important points in connection with a monthly financial statement is the fact that it brings before the management every month the financial status of the company as a whole, showing the profits and losses, assets and liabilities.
Under the so-called “Inventory Method,” profit or loss is only ascertained at long intervals; and in the majority of cases, an unsatisfactory exhibit of earnings cannot be investigated sufficiently to be of any material benefit. Even where such an investigation is possible and results in a betterment of conditions, there is usually a large loss already incurred due to the delay in discovering the defective conditions, whereas, under an accounting system in which earnings are shown monthly in analytical form, any loss or leakage can be immediately investigated, and can, as a rule, be stopped at once, or else be so minimized that no serious loss is incurred. The advantage to the manufacturer is obvious.
Salesmen’s Costs (Form 66)
In addition to the records already described, it is often advisable to keep a record of salesmen’s costs, which will prove valuable as a basis for comparing the ability of one man with another, or one territory or period with another.
Provision may be made for showing the amount of sales, cost of sales and gross profit, and the salaries, commissions and traveling expenses of each man, together with percentages. All information of this nature may be used to advantage in adjusting salaries, commissions and expenses of the salesmen.
Plant and Tool Records (Form 70)
Valuable information which can be used in determining the rate of depreciation, appraising the equipment, etc., is often obtained from records showing the cost value of machinery, tools or other equipment. Besides making provision for recording the first cost, the form may be designed to provide for installation charges, expenses for repairs and maintenance, depreciation, etc. This information may prove especially valuable in determining whether it is cheaper to maintain the old equipment or to buy new.
In plants where a tool-room is part of theC factory organization, it is well to keep tool records in the same way as the material stock record, classifying and arranging the tools so as to show the quantity, and those available for each particular job or machine.
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