156 



THE INDIA RUBBER WORLD 



December 1, 1920 



for their products, aiid the question of at how low a price can 

 they afford to sell the product is of vital importance. Rubber 

 manufacturing cost systems, as generally operated at present, 

 show under such conditions that costs are high and, if business 

 is very bad, they usually show a cost far greater than the amount 

 obtained for the goods. In other words, the present systems 

 of cost accounting go to pieces when- they are most needed. 

 This being the case, many have felt for a long time that there 

 was something radically wrong with the present theories on the 

 subject. 



As an illustration, the writer will cite a case which recently 

 came to his attention. A manufacturer found that his cost on 

 a certain article was forty cents. When he found he could buy 

 it for thirty-four cents, he stopped manufacturing and bought it, 

 saying that he did not understand how his competitor could sell 

 at such a low price. He seemed to realize that there was a 

 flaw somewhere but he could not locate it. When he was asked 

 of what his expense consisted, his reply was: labor fifteen cents, 

 material nine cents, and overhead sixteen cents. He was then 

 isked if he was running his factory at full capacity, and the 

 writer was informed that he was running it at less than half its 

 rapacity, possibly a little over one-third. The next question was : 

 What would be the overhead on this article if the factory were 

 running full? The reply was that it would be about eight cents. 

 The writer suggested then in such a case the cost would be 

 only thirty-two cents. The possibility that his competitor was 

 running his factory full suggested itself at once as an explanation. 

 The next question that suggested itself was how the sixteen 

 cents overhead, which was charged to this article, would be 

 paid if the article was bought. The obvious answer was that it 

 would have to be distributed over the product still being made 

 and would ihereby increase its cost. In such a case it would 

 probably be found that some other article was costing more than 

 it could be bought for; and if the same policy was pursued, the 

 second article should be bought, which would cause the remam- 

 ing product to bear a still higher expense rate. If this policy 

 were carried to its logical conclusion, the manufacturer would 

 be buying everything before long, and be obliged to give up 

 manufacturing entirely. 



The illustration which is cited above is not an isolated case 

 but is representative of the problems before a large class of 

 rubber manufacturers, who believe that all the expense, however 

 large must be carried by the output produced, however small. 

 This 'theory of expense distribution indicates a policy which in 

 dull times would, if followed logically, put many manufacturers 

 out of business. In fact the writer knows of a plant which was 

 recently put out of business by just this kind of logic. 



Fortunatelv for the country, the American people as a whole 

 will finally discard theories which conflict with common sense, 

 and when their cost figures indicate an absurd conclusion, most 

 of them will repudiate the figures. A cost system, however 

 which fails when needed most, is of but very little value and it 

 is imperative to devise a theory of costs that will not fail. 



Most of the cost svstems in use, and the theories on which 

 they are based, have been devised by accountants for the benefit 

 of financiers, whose aim has been to criticize the factory and to 

 make it responsible for all shortcomings of the biisiness. In 

 this the financiers have succeeded admirably, largely because the 

 methods used are not so devised as to enable the agent or super- 

 intendent to present his side of the case. _ _ 



One of the prime functions of cost-keeping is to enable the 

 agent or superintendent to know whether or not he is doing 

 the work he is responsible for as economically as possible, a 

 function which is ignored in the majority of cost systems "ow 

 in general use. Many accountants who make an attempt to 

 'show it, are so long in getting their figures in shape that ey 

 are practically worthless for the purpose intended, the poss. 

 bility of using them having passed. 



THE GENERAL PLAN 



The general plan of cost accounting for a rubber plant fol- 

 lowed by the writer is illustrated by Fig. 1. In applying costs 

 for the rublfe;- industry, the plan outlined is covered by the 

 following formula, which includes and illustrates the successive 

 stages of cost accumulation from gross sales to final net profit. 



Gross sales, k-ss returns and allowances "•^• 



Less: „ 



F 

 Freight — outward 



Commissions 



Discounts 



Total deductions from sales '.^ 



Net sales ^'•^• 



Less: 



Factory cost of shipments 



Materials consumed ^' 



Direct labor employed L 



Factory burden or indirect cost " 



Total factory cost of shipments ''■^■ 



Gross manufacturing profit O.r. 



Less : 



Commercial cost of shipments 



Administrative expense A 



Selling expense S 



Total commercial cost of shipments C.C. 



Operating profit O.P. 



Other income: 



Interest and discount received LR. 



Total S.P. 



(Jther charges : 



Interest expense I.E. 



Net profit N.P. 



Some accountants and executives, will, of course, differ re- 

 garding this method of handling interest, but in connection with 

 the rubber industry the writer's experience has demonstrated 

 that this method is the more feasible. The plan outlined above 

 embraces the establishment of continuous inventon,- control ac- 

 counts for raw materials and burden supplies. Records of raw 

 materials and supplies consumed each month are. obtained and 

 the value transferred to an account which represents the value 

 of work in process. The productive labor employed each month 

 is analyzed and also transferred to the account representing the 

 value of the work in process. 



Various accounts are maintained representing the factory bur- 

 den or indirect cost of operation. The relation of the costs of 

 factory burden and the cost of productive labor is determined 

 and ratios of burden expense developed. Each month, in pro- 

 portion to the productive labor employed, a charge is made to 

 the account representing value of work in process for the pro- 

 portionate share of burden applicable to work in process. The 

 amounts so applied are credited to a reserve account, the object 

 of which is to indicate how closely the charges to work in process 

 for factory burden, compare with the actual cost of factory 

 burden as shown by the aggregate of balances in the various 

 factory expense accounts. 



Records of product finished are obtained which are calculated 

 at cost values, the aggregate being credited to the account repre- 

 senting the value of work in process and charged to an account 

 representing the value of the finished product. At this particular 

 point in the plan of accounting, the plan must be varied accord- 

 ing to the individual needs of a manufacturer. In some cases, 

 instead of one account representing the value of work in process, 

 several accounts will be necessary, representing the value of 

 work in process at successive stages of manufacture. 



Having accumulated the cost of all goods entering into the 

 finished product account, the cost of all shipments is calculated 

 and the aggregate is credited to the account representing the 

 value of finished product and charged to the account repre- 

 senting factory cost of shipment. 



