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BY JOHN WHITMORE. I do not know whether any of you will remember that when I talked here some evenings two years ago concerning machine shop cost accounts I said that I chose the cost accounts of machine shops as a convenient beginning to the general subject of manufacturing cost accounts. It is of course plain that the machinery industry occupies an initial position in modern manufacturing and there is a certain natural order in taking first the accounts of the industry in which the machinery is produced and then the accounts of the industries in which it is operated to give other products. There is, however, a second reason, having I believe a natural relationship to the first, in the fact that machine shop operations are characterized by largeness and directness, rather than by the complexity and minuteness which in varying degrees are found in many other industries. I do not mean that the machinery industry is itself simple. The largeness and directness I speak of come rather from a certain simplicity in the , materials, and a rather considerable average duration of the processes.

The development of cost accounting must begin from simple methods and simple ideas and definitions. In the machinery manufacturing industry as a rule materials can be charged in their original form direct from the storehouse to the cost account for the finished product for which a manufacturing order is issued. And the machine processes, and the work of a single workman, are generally speaking of sufficient duration so that it is quite easy to record the time of beginning and the time of finishing in every case. A very large percentage of the work may be paid by the piece. These are conditions which make possible simple and direct methods in the cost accounts.

Then it is natural to begin with the idea of merely determining the cost of the respective products, that is, to state the cost of the products as they are in succession turned out. This is indeed very generally believed to be the sole purpose of cost accounts.

Later in the practice of cost accounting there have to be considered methods of dealing with less simple materials, handled and treated in the first place in quantities not yet divided up according to manufacturing orders for the product; and with numerous and small operations. And there have to be considered

* A lecture delivered before the New York University School of Commerce, Accounts and Finance, February 19th, 1908.

alternative definitions of cost, and uses of cost accounts going far beyond the mere stating of cost prices for the products.

It is for the purpose of illustrating such developments and of tracing their relation to the simpler forms of cost accounts that I have chosen the cost accounts of the shoe-manufacturing industry as the subject for my present talk to you.

I believe that the existing need in relation to the matter of cost accounting is that it be rendered more systematic. Hitherto it has not been this, whatever merits it may have had. There are principles which may not be violated, general methods which should be accepted as authoritative, lines of development which should be defined; but the student of cost accounting who seeks an explicit statement concerning these things will, I believe, at present not find it. Heretofore we have started out we will say to state the cost of the various products of a factory, and we have used such means as some experience or some faculty of invention have suggested, and without doubt valuable results have by these means been accomplished in individual work. But cost accounting is not systematized by these means, and the materials for the use of the student of cost accounting remain comparatively slight.

In the machinery manufacturing industry we have first the storehouse receiving materials at cost price and issuing them at cost price upon requisitions bearing manufacturing order numbers, with the consequent debits to the storehouse in the first place, and in the second credits to the storehouse and debits to the cost accounts for the respective manufacturing order numbers. Next we have machinists' time slips giving job numbers and the time worked on each job, with the consequent distribution of the pay-roll to the cost accounts. Next we have, amongst the fairly well established methods, the charge to the cost accounts and the credit to the shop expenses of hourly rates for the machine tools used. Then there is a distribution, upon whatever basis may in any case be found to be the fairest, of the remaining expenses of manufacture. What are the remaining expenses of manufacture and what are the rules, as far as there are established rules, for dealing with them? I would say that the remaining expenses of manufacture to be taken up in the cost accounts for product do not include (unless by a separate supplementary charge like the addition to factory cost to cover commercial expenses) the expense of all or any part of a factory being idle beyond a fair allowance for lost time; and I would say that the expenses of a factory having two or more departments should not be generally distributed, but should as far as possible be divided between the departments, so that each department shall have its proper expense rate, and not merely the average expense rate of the whole factory.

Concerning the definition of cost I would say that true or correct cost does not necessarily include every expense incurred in the course of producing an article. Accidents and blunders occur and the cost, as in some instances the cost of unused factory capacity, may be so great that it would be absurd to state it as a part of the cost of the product. If this is established, it establishes the principle that improper costs may be separated and stated under a heading which will distinguish between these and manufacturing expenses properly and necessarily incurred. This principle is rather far reaching; its application may be of the greatest practical value; and it is susceptible of abuse. The danger is of assuming an impossibly perfect standard of working and of failing to allow for a certain unescapable average of accident and failure. Or again of applying in complex work the standards that are fair where work is simple, or in special work where new means of working to a new end have to be developed, the standards that are fair where processes are thoroughly established.

It is possible to carry the application of the principle of distinguishing between proper and improper costs so far as to use calculations of proper costs and then to direct the cost accounting to showing the variations of actual from calculated costs. This involves the setting up of complete standards for quality in materials and efficiency in working, and is not to be confused with estimates of probable cost which are arrived at by any superficial method, or except with the idea of continuously testing actual and calculated costs by each other.

Calculations of proper costs with provision in the accounting for showing the variations of actual from calculated costs constitute a plan which may be adopted for another reason than the one just dealt with. In some industries the manufacturing orders are so numerous that it is scarcely possible to have a separate cost account fully worked out for every order, while it is still quite practicable to have a calculation of cost for every article and to show where and how the calculated costs are varied from. I

could illustrate this to you by describing systems of cost accounts in the hard and soft rubber manufacturing industries and in the stationery manufacturing industry.

As to the purposes of cost accounts I would regard these as being three: 1. The bookkeeping purpose, which is to make a record, to state profits and losses, and to state the value of materials remaining in process of manufacture, otherwise only determined by inventory. 2. The economic purpose, which is to trace waste and by eliminating it to secure the lowest cost of production. 3. The commercial purpose, which is to ascertain the prices at which products can be sold profitably.

I desire, however, as I have said to talk to you to-night particularly about the cost accounts of the shoe manufacturing industry and in describing them to trace the relationship of the methods used to what I have concluded to regard as the basic method used in machine shop cost accounts.

Materials in the shoe manufacturing industry fall into four distinct divisions: 1, Upper Leathers; 2, Sole Leathers; 3, Linings; and 4, Miscellaneous Materials including what are called Findings. Upper leathers are, except for a possible small percentage of them, first sorted to grade them according to the standard requirements in the particular factory, inasmuch as it is not practicable for the manufacturers of upper leathers to sell them graded for the requirements of the individual shoe manufac

Sole leathers may be bought by the side or may be bought cut into outer soles, inner soles, etc., and heels may be bought manufactured. Where the sole leather products are bought manufactured it of course reduces the operations and simplifies the cost accounts, but as the leather is commonly bought in the side, it is necessary to consider it in that form. It has then to be cut up into outer soles, inner soles, and heel pieces, and the heels have to be manufactured. In large factories making the cheaper shoes in large quantities cotton linings may be cut in quantities for stock, in which case the linings department is a separate department, having its separate cost and stock accounts, which are of a simple character. In smaller factories making more expensive shoes the linings are cut for the individual order of shoes at the same time that the upper leathers are cut. Miscellaneous materials include various things, such as buttons, buckles, bows of ribbon, etc., which are or may be issued from the storehouse for the particular shoe orders; and in the same storehouse there may be included the smaller findings, including needles and thread and paste, which are issued in reasonable quantities to the several departments requiring them, and must be distributed to the product as a part of the general expense of the departments severally. The location and the care of the minor materials may be governed by considerations peculiar to each factory. There will wherever cost accounts are kept be inevitably and at least three storehouses: one for upper leathers, and one for sole leathers, and one for miscellaneous materials and findings. Only the last of these three receives and issues its materials exactly as a machine shop storehouse receives and issues them, i. e., receiving them at cost price and issuing them at the same cost price, either upon requisitions bearing the number of a manufacturing order for shoes, or upon a department requisition for supplies chargeable to the department expense account. The upper leather storeroom receives what from the shoe factory point of view are unsorted leathers, and issues sorted leathers. The sole leather storeroom receives sides of leather and cuts them up and issues the various products. It is obvious that these two are not storerooms in the simplest sense. It is proper to consider whether there is a departure from the principle of storeroom control in permitting materials to be worked upon and their form and their cost changed, without formal issue given its full effect not only in storeroom ledgers, but in the controlling stores accounts in the general ledger. I will take first the upper leather storeroom operations and records and describe them.

There is for the upper leather storeroom, as for every separate storeroom, a storeroom ledger controlled by an account in the general ledger under a corresponding title. As upper leathers are bought and received at the factory they are debited to accounts for the various kinds of leather in the storeroom ledger and they are by monthly totals charged to the general ledger controlling account for the upper leather storeroom. So far of course the procedure is exactly the same as it is with machine shop storehouses. There is immediately thereafter a difference. In the upper leather storeroom of a shoe factory they take the skins as they are received and sort them for the purpose I have already described. A single lot of skins as received has of course a single price per square foot. When the single lot is sorted into several grades there must necessarily be a new price for each of these grades. It is plain that there will possibly be something arbitrary

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