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Cost of Production 



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iX 



Editor's Note 



The following paper was road before the Gum Lumber Mnniifaeturers' Association in session at Hotel Gayoso, Mem- 

 phis, Tenn., January IG, by Franli U. Gadd of the Wisconsin Lumber Company, Chicago. 



This appears to be a very popular subject just at this time, and 

 I trust I will be pardoned if I repeat some of the good things said 

 in the numerous papers that have been written of late. The more 

 I can repeat the easier it makes it for me. 



The importance of a good system of cost keeping can scarcely 

 be over-estimated, and you will no doubt agree with me that it 

 is one that cannot be dealt with thoroughly in a paper of this 

 kind which must, of course, be limited in its scope by the consid- 

 eration of time and some consideration for those who are compelled 

 to listen. 



It should be understood in the beginning that cost keeping is 

 not a fad. Executives and operating men in all lines of business 

 are becoming more and more interested in finding out quickly and 

 accurately whether the result of any period of work has been 

 profit or loss, and why. 



The old fashioned way of casting up ac- 

 counts at the end of the year is a thing of 

 the past, or almost so, and accounts are now 

 closed monthly, weekly, and in some lines 

 of business daily. For the manufacture of 

 lumber a monthly accounting system seems 

 most practical. In a general way, we all 

 think we know what it costs to get our logs 

 out, haul them to the mill, to manufacture 

 the logs into lumber and load the lumber 

 on the cars; but unless some system of cost 

 keeping is used we often find such figures 

 pure guesswork, and sooner or later arc 

 confronted with a condition which is, to 

 say the least, embarrassing. 



Many manufacturers depend on their bal- 

 ance sheets to determine the cost and their 

 competitors to fix prices. So long as they 

 keep clear of bankruptcy they can keep 

 their accounts as they please, or neglect to 

 keep any, and are accountable to no one. 

 It is, however, reasonable to suppose that 

 one would wish to operate one's plant prof- 

 itably and honestly; therefore a good sys- 

 tem of accounts is a necessity. 



Each locality has its own problems to 

 figure out, but certain fixed rules are available for the guidance of 

 all. "The elementary principles of cost accounting are simple; 

 but clear insight and care are necessary to put every item of cost 

 where it belongs." What is required in the final analysis are 

 fiigures that show results accurately obtained. The efficiency of a 

 cost statement depends very largely upon the schedule of accounts 

 which lies behind it. If labor, material and expense are properly 

 distributed by departments the final results should be fairly 

 accurate. 



Distribution of Costs 



First, a few words about distributions. Very few hardwood 

 operations can afford the luxury of a timekeeper. This puts it up 

 to the foreman to keep the time. I have a card that the foreman 

 fills out and turns into the office daily showing the man's name, 

 occupation, hours worked and account numbers to which the labor 

 is to be charged. To get this each foreman is furnished with a 

 schedule of the accounts covering the work of his department, 

 which enables him to make an accurate labor distribution. These 

 cards as received are entered on a payroll record. Against this 

 on the first day of each month, or on day employment begins, a 

 charge is made for rent, doctor, or other fixed charges, advances 



FltANK R. GADD, CHICAGO, ILL 



made during the mouth of scrip for trading purposes where com- 

 missary is operated, or of cash, are entered as made. At the end 

 of the month, or payroll period, this book is footed, deductions 

 made and employes paid the balance due. The distribution of labor 

 among the different units of the operation is obtained at the same time. 

 Materials and supplies are purchased on requisition made by a 

 storekeeper and approved by the superintendent. All materials 

 received are checked in by storekeeper and entered on a material 

 received book. As invoices are received the receipt of material 

 is checked f|rom this book, prices and extensions are verified and 

 invoices passed to office for payment, thus reducing to a minimum the 

 chance for error. 



Payments as made are charged to a stores account. This ac- 

 count is subdivided for the storekeeper into a long list of sub- 

 accounts covering all the different classes and kinds of material 

 common to a sawmill operation. These sub- 

 accounts are carried on cards, a separate 

 card being used for each account. As in- 

 voices are passed the storekeeper charges 

 the amount to the proper sub-account. Ma- 

 terials are issued only on requisition made 

 by foreman or storekeeper. These requisi- 

 tions, as filled, are priced, extended and en- 

 tered as a credit on these cards. At the 

 end of the month the issues are totaled up 

 and distribution made. These cards are bal- 

 anced up at the same time and the total 

 must agree with the controlling stores ac- 

 count in the office. On all miscellaneous 

 materials a sufficient amount shall be ail<led 

 to cover freight, handling charges and 

 shrinkage. 



Fixed charges, or overhead, such as de- 

 preciation, taxes, insurance, general expense, 

 etc., are ascertained, and as a rule distrib- 

 uted under special instructions. It is one 

 thing to determine what are fixed charges 

 and quite another to arrange for their 

 equitable distribution. The aim is to have 

 each unit of product bear its due and proper 

 proportion of the total. 

 Depreciation is an impairment of the value of an asset by reason 

 of wear or tear, accident, time, or similar cause and provides for 

 the constantly diminishing life of different portions of the plant 

 a reserve to reproduce the plant. Depreciation on a sawmill opera- 

 tion should be figured on the entire investment, exclusive of timber 

 holdings; the charge depending entirely upon the value of the plant 

 and the amount of timber behind it, but, obviously, it must be 

 large enough to have taken care of the investment by the time the 

 operation is finished. Depreciatiou should be charged direct to 

 departments instead of leaving it in the general overhead. 



Insurance may comprise fire, boiler, liability and fidelity insur- 

 ance, all of which must be charged direct to departments affected. 

 Liability insurance is a direct charge on labor. 



Taxes on timber holdings should be charged to land and timber 

 account; on lumber stocks to your trading account, and on plant 

 to mill and its different departments. 



General expense comprises all expense that cannot be charged 

 direct, such as traveling expenses, telegraph and telephone, sta- 

 tionery, postage and other office expense, insurance, depreciation 

 and taxes on office buildings, etc. 



Each department must take up all of the cost of repairs and 

 maintenance that can be specifically charged to it. Ordinary 



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