ments rests on the withholding agent unless the status of employer and employee is again created during 1920 and further payments of compensation for personal service are made or credited in 1920.

Certificates filed with the employer by residents (form 101) should be retained by him and kept available for one year for examination by representatives of the comptroller's office. Forms 102-revised are to be used by non-residents for the purpose of claiming personal exemption. These are to be forwarded to the income-tax bureau by the withholding agent, with the return of tax withheld on form 103 and accompanied by payment of the tax withheld.

Returns of information (form 105) should be made for the calendar year and filed with the income-tax bureau on or before April 15th next. In cases in which actual withholding and report thereof is made, no return of information is necessary.

Probably the most important change is stated in section 371, providing that a return of income must be made on or before the 15th day of the fourth month following the close of the taxpayer's taxable year, if the return is made on the basis of a fiscal year, or, if the return is made on the basis of the calendar year, on or before the 15th day of April in the year following the close of the taxpayer's taxable year.

Accountants, no doubt, are interested in the ruling relating to valuation of inventories in 1920. Coincident with the federal treasury decision and cognizant of a declining market the comptroller's regulations permit merchants to value their 1920 inventories at "cost or market, whichever is lower," regardless of previous practice and without applying for permission to change. If this rule is adopted, the fact must be stated on the return. The change is limited to 1920 inventories, whether the end of the period is based on a fiscal year or a calendar year. Inventories taken on January 31, 1921, must be taken by the same method as previous inventories unless an amended return is filed for the period ended in 1920 or permission is granted for the later period ending in 1921.

By G. H. NEWLOVE

NATURE AND FUNCTION OF COST ACCOUNTING

Cost accounting is that specialized application of the principles of accounting that results in the collection of the data to determine the cost of producing a unit of production in a factory. It is possible to obtain from the general books certain ideas as to the manufacturing costs, but it is quite impossible to obtain from the general accounts the cost of a particular unit of product in case more than one kind of article is turned out.

Cost finding, the method used in determining in advance what the cost of an article should be under existing conditions, must not be confused with cost accounting, the method of determining costs while the article is being produced.

The purposes of cost accounting are: (a) to determine the cost or the profit on each unit of product, (b) to determine the profitable lines for manufacture, (c) to secure accurate and perpetual inventories and (d) to secure information necessary to lay down wise managerial policies.

COMPONENTS OF COST DATA

The ordinary manufacturing concern naturally divides itself into three parts: a fabricating section, an administrative section and a selling section. Each of these sections has it own charges to contribute to the final cost of the product placed in the hands of the purchaser. The fabricating section, however, has three kinds of charges quite different in nature, namely, material, direct labor and overhead. Upon the addition of each of these various classes of expenses to the value charged against the product, a new kind of cost is secured, as shown in the following chart:

The outlays with which cost accounting is concerned include the charges necessary to put the product through the factory. The analysis of factory expenses demands an understanding of the terms "direct" and "indirect" as applied to labor. The cost of direct or productive labor is the charge for services rendered directly at the tool-point in the fabricating process. The cost of indirect labor is the outlay necessary to the conduct of plant, but is not directly chargeable to certain specific units of product, as the salaries of foremen, of timekeepers and of repairmen.

The usually accepted cost of raw materials is the invoice price plus in-freight. This cost, added to the cost of direct labor, makes up the prime cost. Manufacturing expense, or factory overhead, includes such charges as taxes, insurance, maintenance and depreciation of factory buildings and machinery, power, heat, light, superintendence and other indirect labor and miscellaneous supplies.

RELATION OF COST TO GENERAL ACCOUNTING

General accounting is the record of facts involving the economic relationship of the manufacturer to the world at large, while cost accounting is the record of facts involving the internal relationship of the various cost elements and production departments. General accounting is fiscal in its nature, while cost accounting is statistical.

Cost accounting is not a system per se to be set aside and distinguished, as we distinguish single-entry and double-entry as bookkeeping systems; it is rather the application of double-entry principles for the purpose of determining unit cost in manufacturing.

Manufacturing accounts are controlled by certain accounts in the financial books. This control may be accomplished by either of two general methods. Under the first, one account, termed "factory ledger," is used in the general ledger. This account is debited with all charges against manufacturing operation and credited with all products coming from the factory. A similar account in the factory ledger is used, bearing the name "general ledger," the entries to which are contra to those in the factory ledger account in the general books. The second method is to carry in the general ledger several accounts by means of which the cost accounts are controlled. Such general ledger accounts

would be "productive labor," "raw materials," "factory expense," "goods in process" and "cost of sales."

Wherever practicable, the factories are divided into departments, and departmental accounts are set up. The advantage of having separate departmental accounts for rent, depreciation, power, etc., can readily be seen from the fact that one department may have little machinery and a large amount of floor space, while another department may have very little floor space and very costly machinery.

COMPARISON OF COST AND NON-COST SYSTEMS

In order to illustrate the difference in the operation of the accounts under cost and non-cost systems, journal entries covering the various classes of transactions under the two systems will be tabulated and posted to the accounts given in a starting balancesheet, which is the same under both systems, and then trial balances and financial statements will be drawn up for the accounts under each system.

JOHN KAY MANUFACTURING COMPANY