December I, 1920 



THE INDIA RUBBER WORLD 



157 



\'arious accounts arc maintained representing the details of 

 administrative and selling expenses, and in order to be assured 

 that the ratios of administrative and selling expenses to the 

 total factorj- cost are correctly employed in cost calculations 

 there is provided an account representing the commercial cost of 

 shipments, to which is charged an amount representing the esti- 

 mated value of administrative and selling expenses based upon 

 the factory cost of goods shipped. The amounts so charged to 

 the commercial cost of shipments are credited to a reserve for 

 a commercial burden. The balances in the latter account repre- 

 sent the aggregate of amounts applied to the commercial cost 

 of shipments for commercial burden, and should be in substantial 

 agreement with the accounts representing the details of adminis- 

 tive and selling expenses. 



Separate accounts are maintained representing the cost of 

 freight outward, commission and discounts allowed, which are 

 considered as deductions from gross sales. All returns and 

 allowances are charged against gross sales. 



To determine the operating profit, therefore, in the manner 

 indicated in the formula outlined in the foregoing, the amount 

 of sales after the deductions have been made will be contrasted 

 with the factory cost of shipments, plus the commercial cost of 

 shipments, with the object of showing the operating profit. 



Interest transactions will be considered after the determination 

 of the operating profit and will be considered as direct addi- 

 tions thereto, or deductions therefrom, to arrive at the net profit. 

 The transactions briefly described in the foregoing are to be 

 recorded by months, with the very important object of obtain- 

 ing a statement of monthly earnings. 



ESTABLISHING BURDEN RATES 



One of the first steps in establishing costs is to work out the 

 ratio of burden to the direct labor charges for the various de- 

 partments of the business. This is to provide the mechanism 

 for making a charge each month to the account representing 

 work in process, to cover the burden applicable to the cost of 

 the product, in proportion to the amount of direct labor in- 

 curred during the montli. It is preferable to make these charges 

 at percentage rates according to the individual departments ; that 

 is, the ratio which the expense in a department bears to pro- 

 ductive labor in that department is determined ; and for all 

 productive labor charged to work in process there is a further 

 charge made to that account, based upon the departmental per- 

 centage rate, to cover the burden applicable to the cost of the 

 product. These amounts are credited to the reserve for factory 

 burden account, which represents at all times the accumulation 

 of amounts applied to the costs to cover the burden charges. 

 The principal advantages of the use of departmental expense 

 rates in the calculation of burden charges are as follows : 



(a) Closer values may be obtained for determining the 

 selling price of partly finished product. 



(1)1 Closer values may be obtained for use in pricing the in- 

 ventory, which would, of necessity, be found in all stages of 

 process. 



The aggregate of the general accounts representing the burden 

 of indirect costs of manufacture will be in substantial agreement 

 with the aggregate amounts of burden applied to the cost of 

 production, as shown by the balance in the reserve account, if 

 the production be upon a normal basis and the ratios of burden 

 costs correctly compiled. Should the aggregate of the balances 

 ill the expense accounts be greater than the aggregate of burden 

 applied, it would indicate that an increase should be made in the 

 ratios used in applying the burden ; but, on the other hand, 

 should the aggregate of the balances in the expense accounts be 

 less than the aggregate of burden applied, a decrease should be 

 made in the expense rates. Should such variations occur as the 

 result of abnormal operating conditions it is recommended that 

 no radical changes in the expense rates be made, but rather that 

 Ihc variations should be considered as a separate charge to the 



operating profits of the year. It is inadvisable, for comparative 

 purposes, to absorb in individual costs extraordinary expenses 

 due to abnormal conditions. 



The method of working up the percentages of burden in re- 

 lation to direct labor varies with local conditions and at in- 

 dividual plants. Certain items, such as supervision, are dis- 

 tributed over the various departments in ratio to the direct labor 

 itself, while others, such as heat and light, are apportioned ac- 

 cording to floor area. The local conditions must be carefully 

 examined to determine the proper basis for each case. 



INTERLOCKING FACTORY COSTS INTO FINANCIAL ACCOUNTING 



An essential feature of any cost plan is to absorb and check 

 the actual accumulated cost figures by financial accounting that 

 the total of ail individual cost figures will be reflected and 

 proved into monthly balance sheets. This is provided for by 

 the establishment of a private ledger and a works ledger which 

 must balance each other through controlling accounts. The 

 accumulated cost figures are absorbed by the works ledger and 

 the accumulated financial figures by the private ledger, thus 

 assuring that each balances the other and that all transactions 

 are absorbed by the one or the other. 



ESTABLISHMENT OF PRIVATE AND WORKS LEDGER 



To establish the cost plan correctly and the proof of the works 

 ledger it is necessary to provide two controlling accounts which 

 will represent the total investment in the form of raw materials, 

 parts and product in process, finished product and factory ex- 

 penses. 



One of these accounts is carried upon the private ledger and 

 is known as the works ledger controlling account symbol B. 

 The other controlling account is known as the private ledger 

 controlling account and is carried upon the works ledger, having 

 the same symbol B. These two accounts act as controlling ac- 

 counts to each other, and at the end of each month their balances 

 should be in agreement. 



At the beginning of the year the works ledger controlling 

 account, symbol B, in the private ledger is charged with the 

 total amount of the inventory. Through the year this account 

 is charged with the total cost of all purchases of material, pay- 

 roll and factory expenses. It is credited with the cost of all 

 goods shipped and charged with the cost of any goods returned. 

 The balance of this account will, therefore, at all times represent 

 the total of raw material, work in process and finished stock 

 inventories. 



The foregoing describes in general the methods to be used in 

 order to establish the accounts necessary for a monthly loss and 

 gain statement supported by cost records as carried in the works 

 ledger and controlled by the general books. The control of 

 costs is thus obtained through proof of the balance in the various 

 accounts in the works ledger in the following manner ; 



(a) When the balance of the various inventory accounts agrees 

 with the physical inventory accounts, a proof is furnished that 

 the value of materials consumed is substantially in agreement 

 with the cost of the material. 



(b) When the aggregate of the various factory overhead ex- 

 pense accounts, as a total, is in substantial agreement with the 

 credits written off to the work in process burden, a proof is 

 established that a proper percentage of burden expense has been 

 used. 



Considering the foregoing, it should be held in mind that tlie 

 work=; ledger will give proof of the accuracy of the cost records 

 and through these the loss and gain statement. Should there 

 arise any question as to the amounts shown in the cost records, 

 an analysis may be quickly made and traced through either the 

 material, labor or expense accounts. The entire plan is sub- 

 jected to direct proof when physical inventories are taken at 

 different periods of the year. 



(.To be continued) 



