Cost Accounting – Material and Labor

Requirements of Cost Finding
The final cost of any order, article or process may be divided into four principal parts, viz:
(1) Material cost
(2) Labor cost
(3) Department indirect expense
(4) General indirect expense
Three important considerations are involved in arriving at final costs.
(1) The cost data must be recorded.
Reports and forms are devised upon which are recorded the various transactions involving raw or part-finished material, the time spent by employees upon various jobs and operations, the wages paid, and the amounts that go to make up the various items of indirect expense. These forms are the original records.
(2) The cost data must be compiled and distributed.
The data, as recorded, must be arranged and classified so as to facilitate the distribution of costs to the particular class of product, to the department, or to the operation, as the case may be.
(3) The cost books must be interlocked with the financial books.
The cost books contain the data showing the analysis of the elements of cost, all of which should be controlled by the financial books, so as to permit of a verification of the mathematical accuracy of the transactions in the cost records.
Recording the Material Cost
The transactions that deal with material may be classified as buying it, receiving it, storing it, putting it into operation, tracing it, and re-storing it as part-finished or finished stock. Part-finished stock includes all parts of the product made in different parts of the plant and transferred either to stock or to an assembling department. Any product on which the operating processes have begun but are not yet finished, is termed work in process, except where part-finished stock is transferred from Work in Process account to Part-Finished Stock account.
The forms upon which information about material is ordinarily recorded, are:
(1) Purchase Requisition
(2) Purchase Order
(3) Material Received Sheet
(4) Stock Record—Raw Material
(5) Production or Factory Order
(6) Material Requisition or Bill of Material
(7) Inventory Test
When the information on any of these records is to be used by different departments, carbon copies should be provided, the duplicates being distinguished by different headings, colors, or textures in the card or paper.
(1) Purchase Requisition (Form i)
A “Purchase Requisition” is a request for the purchase of raw material or supplies, made out preferably by the stores clerk, but sometimes by the superintendent, or the man in charge of the department requiring the material or supplies. Every factory should determine standard maximum and minimum amounts of raw stock and supplies to be carried, below which it is not safe to go on account of the risk of delay in filling orders, and above which it is inadvisable to go on account of the capital that would be tied up. This being settled, the maximum and minimum amounts to be carried should be posted where the material is stored, and should also appear on the stock record. When the amount on hand approaches or passes the minimum, a purchase requisition is made out, and after being approved by some person in authority, is sent to the purchasing department. A rush order should be so indicated on the requisition.
A form of this description does not usually enter into the practical part of a cost system. It may be properly termed an organization form, pure and simple. It must clearly indicate the material desired, but beyond this almost any design will answer the purpose intended, as the information on the form is not often needed after the goods ordered have been received.
(2) Purchase Order (Form 2)
The filing of catalogues and quotations is a matter of office organization, and only the purchase order concerns the cost clerk. The form is made out in duplicate, or in as many more copies as desired. The original copy goes to the selling firm, and the duplicate is kept by the purchasing concern on the file of unfilled orders. The purchase order is given a serial number, which should be entered by the selling firm on its invoice, as a means of simplifying reference to the order if any question arises.
Should it be desired to use a copy of the purchase order as a material received record, short width carbon paper is used, and a triplicate copy made containing the items only, without specifying the quantity or price. The copy goes to the receiving clerk, who then enters in the “Quantity” column of the order the actual amount of material received. The receiving clerk is thus compelled to count or measure the incoming material, and cannot shirk this duty by using the figures on the purchase order. When the goods have been received, counted and inspected, the triplicate is returned to the office for the purpose of checking it with the material as billed upon the invoice from the creditor; and claims for shortage or damaged goods can then be made at once.
(3) Material Received Sheet (Forms 3 and 4)
Where it is not advisable to use a copy of the purchase order as a material received record, a distinct and separate form is used.
The choice of forms for this purpose will depend largely upon whether charges consisting of freight, drayage, etc., on raw material received are to be added to the material cost. If this is not the case, a very simple form will answer the purpose; but if such charges are included, the design will depend largely on the class of product received and the distribution of the charges.
Provision should be made on the material received record for showing the purchase order number, the items, name of article, quantity, and the apportioned amount of freight and delivery charges for each item, if these charges are to be added to the material cost. If the material is to be used at once, especially for certain orders or departments, columns may be provided for recording the distribution of the cost and the charges.
If the goods are not to be opened until they are used in certain departments, the invoice must be accepted temporarily as the record, and any “over, short or d~.nage” claim made later. It will be seen that the purchase requisition, purchase order, material received sheet and invoice act as a complete check of the transactions from four different sources. One reason for using a material received sheet to report goods received, instead of following the usual method of checking up from the invoice, is to insure an actual count and inspection of the goods, with the resulting accuracy secured, instead of depending entirely upon the honesty or carefulness of the clerk receiving the goods or checking them off.
(4) Stock Record—Raw Material (Forms 10, 11, 12)
The “Stock Record” is one of the most important of the factory records. It bears the same relation to stock that the cash book does to money, and should be kept with just as much care as the cash book. Stock represents money, and is, indeed, only another form of it. In the same way that the cash book shows the receipt and disbursement of money and the balance on hand, the stock record shows the material received, material delivered, and what should be in the storeroom.
The effectiveness of a stock record depends much on the actual storeroom accommodation, and on precautions taken for not allowing any but properly authorized persons to remove material from its designated place. If access to the storeroom is easy for anyone, material is likely to be taken to fill orders when the material requisition is incomplete; or the men will replace material damaged in process, without making a record of such withdrawals. The latter is an important leak, and must be watched closely, for if it exists, it both falsifies the costs and creates trouble in the stores department.
The storeroom should be centrally placed, unless a separate storeroom is conducted for each department. In the latter case the storeroom and tool-room may be run in connection with each other. The racks, bins, etc., should be arranged with reference to the materials, so that the whole will have an orderly appearance and not look like a junkroom. Disorder in appearance tends to create disorder in handling. The matter of bin tickets and finding lists, etc., depends on whether the stores are complex and contain a great variety of articles more or less similar.
To record the location of material and to save time and space, a system of reference numbers and letters should be devised. Thus B-4-C-17 might mean a 4-inch bolt to be found in division C, section 17, in the storeroom, where B is the reference letter that stands for all bolts. These symbols may be used throughout the system of records and accounts with a great saving of time and trouble.
Special storerooms or yard places should be reserved for heavy and cumbersome materials, close to the place where these materials will be needed.
A systematically conducted stock record performs other valuable functions besides showing leaks. One of the most important of these is to provide the data for the “perpetual” or “going” inventory. The troubles of ins
ventory taking are well known. It usually takes a long time, causes much work, and sometimes necessitates the temporary closing of the plant. Even then the accuracy of the inventory is questionable, especially as to goods in process; yet its information is essential in the preparation of any reliable statement of financial standing and earnings. With a well-kept stock record these usual inventory troubles are avoided, as a complete inventory is at hand at any time, showing both the amount and the value of materials in the storeroom, in process, and in finished parts. In order to do all this, the record must be designed with columns for material ordered, received, requisitioned out, and balance on hand.
Besides these columns for inventory information, extra columns may be added to distinguish between material reserved for orders already received and the balance available. This distinction, together with the record of the maximum and minimum amounts, and a column showing material ordered but not yet received, gives all the information necessary for keeping the stock supplies up to working requirements in every respect.
When the same article is carried in stock in numerous sizes, colors, styles, etc., it is sometimes advisable for easy reference to use one sheet for the article as a class, and group the different varieties in separate columns. Active stock will require separate sheets for each article; but where purchases are infrequent and the stock is drawn out in large quantities, one sheet may be sufficient for several, blank lines being left between the different articles.
The stock record should be verified from time to time by actual count, so that any discrepancy or leak may be discovered. It is good policy to verify a certain number of articles each day or week, without letting it be known in advance which articles are to be inventoried. This plan is described in connection with the inventory test (Form 60).
(5) Production or Factory Order (Forms 13-17)
The importance of the production order depends on the functions it is designed to perform. In practice it ranges from a mere informal notice to begin operations upon a certain class of work up to a complete controlling and cost-finding agent of a special order. Its primary purpose is to substitute written for verbal instructions, so as to avoid mistakes. Besides this, it may be so designed as to describe the order, state the material, patterns and dies needed, plan the work as to time and department, trace the work at any stage, report the actual production and classify it as good or defective, collect the costs as they are incurred, and also show their distribution. It is not recommended, however, that the form be used for all these purposes, except under certain conditions in a special order system.
Production orders are of three kinds, and each kind should have a distinctive size, color, or heading, as the costs incurred are of different nature and must be charged to different accounts. The three classes of orders are:
(1) Manufacturing production order, which applies to the regular output of the factory.
(2) Shop production order, which provides for construction, renewals, or changes in the factory.
(3) Repair production order, for making necessary repairs to the equipment.
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As many copies of the production order may be prepared as the conditions demand. One copy may go to the stock clerk, so that he will know what the requisitions should call for, and prevent employees from taking out materials for an order not issued. When a copy is used in this way, the stock clerk should check the material that relates to the order, and should not deliver any extra material except upon the authority of the superintendent or manager, any such supplementary requisition giving the reason why additional material is required. Used in this way, the production order guards against dishonesty, and brings to light mistakes and defective work.
A second copy may be sent to the shipping clerk with directions as to the disposition of the finished product, so as to facilitate deliveries. A copy may also be kept at hand in the manager’s office to inform him of the orders that are being worked on in the shop.
When an order is issued covering a product that passes through several departments, some of which require different specifications, or when the work on the order is to go on simultaneously in several departments, sub-production orders may be issued for the work of each department. If the work is well systematized in the factory, sub-production orders may be issued at once, to all departments, stating the exact day the order is supposed to reach them. If the work falls behind the schedule, it is known at once; and the foreman of the department in which the delay occurs is asked to explain. This method of keeping work up to schedule time is especially valuable in case of orders where shipment is guaranteed by a certain date.
The production order may also be in coupon form, each department filling out its coupon and turning it in at the time the job is transferred to the next department. The work can thus be located at any time by the coupons on file. When used in this way, the production order takes the place of the piece tag which is often used to follow a job through the plant, and which shows that the necessary material for a particular job has not been appropriated for other uses.
If the production order is used to record the cost in addition to regulating the production, the form should be designed to show the material used, employees’ time and wages, and indirect expenses. Provision may also be made for the classifying of such special indirect expenses as can be charged directly to the order. The design should be such that the cost clerk may arrange the data and ascertain the total cost of the order directly on the form. The order then serves the purposes both of collection and of compilation.
When an order covers large contract work it is often desirable to divide it among departments and into sections—”sections” here meaning not parts of the department, but parts of the work to be done. The time of the employees should then be reported, showing the time consumed in each department on each section of the work. By using section numbers it is possible to compare costs with estimates, and to follow the progress of the work more intelligently.
(6) Material Requisition or Bill of Material (Forms 18-23)
(1) A “Material Requisition” is generally used where the material consumed on orders is subject to constant changes. It is made out by the department requiring the stock, and presented to the stock clerk, who may compare the requisition with the corresponding production order before honoring it. The requisition should be dated and numbered, should show in detail the description and quantity of the material wanted, should be signed by the party receiving the material, and approved by some one in authority. Provision for costing the material requisitioned out will depend upon the stock system in use— that is, upon whether the system provides for showing quantity only, or both quantity and amount.
(2) A “Bill of Material” may be compared with a regular formula, and is used when consumption of material is definite. It takes the place of material requisitions in factories where the same articles are manufactured repeatedly, using the same amount of material. A bill of material is made out for each article manufactured, and a copy given to the stock clerk. When the production order is used as a material requisition all that is necessary is to present a copy of the same to the stock clerk, and he will give out the material according to the amount to be manufactured.
No material should ever be issued not covered by the bill of material, unless on a supplementary material requisition, showing either that there is something wrong in the original bill, or that there has been defective material or work. Nor should any material ever be given out without a receipt from the party taking it.
Where many different kinds of material are used in one article, and the product of the plant is fairly standard, the bill of material may be printed in quantities according to articles, and the printed copies used as separate requisitions. When the material for an order is required, the bill of material given to the stock clerk should specify the order number, as well as the number of articles. When the material is drawn out the stock clerk should check it and have it receipted for as it is delivered.
In the event of material being returned to stock, a storeroom credit slip should be issued and be attached to the original requisition, or, if preferred, a regular form of material requisition or bill of material may be used and stamped “Returned.”
Where operations are suspended, to be taken up again later, or where the product is not assembled until after sale, much of the material finds its way back to storerooms, and must be drawn out by supplementary requisitions. The part-finished stock or finished parts’ requisition is made out by the assembling department, or by the sales department if the parts are sold separately.
Where a process system is used, and the cost is charged to the process, and not to an order number, the bill of material may be made out according to operating departments; and the list of material classification need cover only the items used in that particular department or process.
(7) Inventory Test (Form 60)
This form is intended only for testing the correctness of the book inventory, i. e., the stock record, and may be used in connection with raw material, part-finished and finished stock, and sometimes with goods in process of manufacture, depending upon the system in use. Where inventories are not taken at frequent intervals, some means of testing the correctness of the book inventory should be provided. The reliability of cost figures depends to a great extent upon the correctness of the records showing the quantity of stock received and delivered to the operating departments of the factory.
Whenever it is desired to test the correctness of the book inventory as to any particular class of material, the stock clerk should enter the article and location only on the inventory form, after which the amount of the material on hand should be counted and entered under the caption “Actual Count.” The amount on hand, as shown by the book inventory, should then be entered under the caption “Book Inventory,” and if these figures are the same as the actual count, the form should be dated and filed for reference. If, on the contrary, there is a difference between the book inventory and actual count, the difference should be stated, and, if possible, the cause ascertained.
A difference between the actual count and the book inventory will represent either errors in the stock records or material taken out of stock without a requisition. If the difference cannot be located, so that the proper corrections may be made on the records, the amount of the difference should be charged or credited as the case may be to the proper stores account, and posted to the account styled “Over, Short and Damage.”
Recording the Labor Cost
Labor often constitutes the most important and influential element in manufacturing and production cost. Small variations in the methods of handling the men and their reports may lead to great differences in results. That this importance is realized is shown by the large number of firms manufacturing devices for regulating labor and gathering and compiling the labor costs. Time clocks, time stamps, patent time cards, etc., of many makes are on the market for factory use. The complex and variable conditions that exist in manufacturing naturally necessitate a wide variety of methods and forms for gathering the costs.
All forms for this purpose may be termed “Time Reports.” Without regard to any particular design, the successful operation of such reports depends largely on the manner in which they are introduced. Clerical labor on the part of factory employees should be reduced to a minimum, so as not to antagonize the men or the management; and what detail work is necessary should be made as much a matter of easy routine as possible.
Requisites of Time Reports
Some of the questions that should be considered in choosing or designing time reports are as follows:
(1) Is the form to be filled in by an employee, or a time clerk, or will a mechanical device such as a time stamp be used?
The first two methods are subject to the criticisms that they are inaccurate, give opportunity for “doctoring” reports, interrupt the work too much, or require too much clerical labor. The time stamp or time clock remedies much of this; and in the end the installation of such devices will be less costly than the trouble which arises from other methods, especially if the factory is of any size or complexity.
(2) Is the form to show the time daily, weekly or monthly?
(3) Is the form to show time only, or both time and cost?
If cost is to be included this will call for additional columns for the cost and perhaps its distribution.
(4) Is it to show direct production costs only, indirect only, or a combination of both?
(5) Is it to be used by individual employees or by department groups?
Combination reports for all the men doing the same class of work may be entered on a single sheet, which may also be arranged in a pay-roll form and used as a part of the general pay-roll.
(6) What is the wage system in use?
If piece-work, the report need show the quantities and time only, the cost being left to appear on the payroll and cost records. When the work is partly day-work and partly piece-work, either additional columns or separate forms may be chosen. If a sliding wage scale is used, as in the differential rate or premium system, the costs should appear on the report, separate columns being added if desired, to show the extra wages earned. The rates may also be printed on the card.
(7) Are the reports based on the time for one article or process, or on the number of articles per unit of time?
If the latter, the report may provide for data covering several days or a week. If the former, the report should have columns showing the labor cost applying to each order number or article, unless the time is summarized on another sheet for this purpose.
(8) Is the labor to be charged to the product direct, or to the machine or process under a machine rate method?
In either case a time unit or a quantity unit may be used as standard.
If the labor is to be charged to the product or the order as a whole, provision may be made on the reports for summarizing the charges of the different parts, though these are generally recapitulated on separate sheets. When a machine rate system is in effect, the name or order number of the article, machine, or process chargeable should be shown. It is often desirable to have a space on the report for defective work; and in a machine rate system the reports may include the distribution of other charges, thus making the form a statement of the costs of a particular machine.
The whole system of time reports should be devised with certain purposes in view. It should be possible to compile and analyze them to find the labor cost of (1) any order as a whole, or any part of it; (2) each article of a class; (3) any operation or process, either on the basis of each article or order, or per unit of time.
The time and cost devoted to production should be easily separated from the time and cost of non-productive labor. Further, the arrangement of the time report should be designed to facilitate the preparation of the pay-roll. Occasionally a system can be devised whereby, as already suggested, the time reports turned in become the pay-roll without any further recapitulation. A time report where quantities are shown may be used in certain conditions as a production report, which, when summarized by departments, will give the production report of the whole department.
Forms of Time Reports
A number of time report forms are shown in the present volume (Forms 26-34), not with the intention of standardizing any of them, but in order that the different conditions encountered in gathering and recording labor cost may be properly covered, and in order to suggest methods of gathering labor cost data.
Daily Time Report (Form 26)
This is a daily time report, intended to be made out by the workman. It is used where the labor cost is charged to a classification of product, and not to an order number or process. The report may be used either for day-work or piece-work, in factories where a quantity of the same article is produced.
Daily Time Report (Form 27)
This also is a daily time report, to be made out by the workman. It is intended for collating the cost data according to department, order number and section number. Provision is made for showing the time of beginning and finishing, the amount of production—defective and good—and the amount of the labor cost.
Weekly Time Report (Form 28)
This is a weekly time report, made out by the workman, showing the quantity produced and labor cost according to department, machine number, order number and operation. Provision is made for showing the time daily for a week, and the total time at the end of the week.
Daily Time Report (Form 29)
This form is a daily record made out by the workman, showing the quantity produced and labor cost according to department and order number. It may be used either in day-work or piece-work. The special feature of this form is its provision for showing the material cost of the production as turned out daily.
Daily Time Record (Form 30)
This design is intended to be used as a daily record for one order number in conjunction with a time stamp. While the operations are printed on the card to save writing, only one operation can be registered at a time. This is done by using a check mark for the operation worked on. The design provides for showing the quantity, total time, rate and cost, and provision is also made for extra wages under a premium system. The design may also be used where the labor charge is made against the machine..
Daily Time Record (Form 31)
This form is also intended to be used as a daily record for one order number or operation in connection with a time clock. The mechanism of the clock, when the card is inserted, punches the beginning and ending time. The record also provides for the reading of the elapsed time without calculation. It shows the order number, account number and amount of production, as well as the time, rate and amount.
Daily Time Record (Form 32)
This design provides a daily record of the time spent on an operation, the starting and ending time being punched in the columns provided on the left-hand side of the card. The elapsed time must be calculated and entered on the face of the card. The operation should be checked off, and the cost should show according to department or order number. Provision is made for showing quantity and premium rate.
Under the caption “Waiting Time” on this record is shown the amount of lost time incurred by the operator in waiting for work, due to either accident or neglect in the operating department.
Daily Time Record (Form 33)’
This record is to be made out daily by the workman, and provides for charging his time against a machine, operation or process. It shows the total machine hours, time started and time finished. Provision is also made for the premium plan of paying wages.
Self-Figuring Time Card (Forms 34a-c)
Forms 34a-c are intended for use in small plants, or where a few workmen only are employed on a certain job, so that the time cost may be summarized on the card.
A daily time card is provided for each workman who renders direct labor in the manufacture of a product. This is in the form of a disk, representing the dial of a clock. The time divisions indicated distinctively are the hour, the quarter hour, and five-minute intervals. Each card is serially numbered, a series being allotted to each class of product or article. This card is issued to the workman on his arrival in the morning, his arriving time being punched on the card by the superintendent, timekeeper, foreman or employer, as the case may be. On leaving the shop for any reason the workman must present his card for punching, so that this card serves the purpose of a time clock.
The most thorough records are obtained when every punch mark made on the card indicates the identity of the person punching it, in the same way that railway conductors indicate their identity by their punch mark on tickets.
The daily time card is intended to be used in combination with the self-figuring cost card. This, comprising also a job card in disk form, is only slightly larger than the time card. The cost card accumulates upon it the following data:
(1) The record or identity of each workman who renders direct labor on that job.
(2) The number of the job and the date.
(3) The time and exact money cost of each workman’s labor on the job. As many as eight different wage rates are automatically figured on the card, so that the cost of the time the respective workers spent on that job is readily determined.
(4) The cost of materials directly used on the
job.
(5) The indirect or overhead costs properly chargeable to the job.
The cost card has a series of concentric circles, each constituting in effect a column of numbers. These are the money equivalents of the time divisions or intervals shown on the time card. Each circle represents twelve hours of labor cost, shown in five-minute intervals, and each at a different wage rate.
One circle, for example, is for a $20.00 per week workman, another for an $18.00 man, another for a $16.00 man, and so on.
For illustration, a workman upon arrival is given his time card with a perforation showing the time. He is also given his job card, which indicates his job; and he sets to work—the time of beginning being punched on his time card. When he has finished his part of the work on that job, he places his time card on the job card so that his “starting” perforation is over the starting point of time cost in his circle or wage level. He then punches both cards at the spot representing his finished time. By this punch he has indicated the number of cents’ worth of his labor to be charged to that job, without any figuring. The next workman at the same wage rate who works on that job, follows the same course as the first, except that when indicating his finishing time he lays his time card over the job card, so that through his “starting” perforation he sees the “stopping” mark of the previous workman. In this way the direct labor cost is cumulatively recorded on each job. If the rate of the second man is different, he places his starting punch on the starting point of the cost card as before, but in the circle which represents his rate of pay. As each job card of this standard design has only the costs of twelve hours of work for each of eight wage rates, more than one job card should be used where more than this time is consumed.
On the back of each card is a ruled space for summing up the total costs. When a cost card has been filled, the total costs it contains are noted on a fresh card in the total cost space; and the process is repeated as often as is necessary.