Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER NINETEEN SOME GENERAL PRINCIPLES ILLUSTRATED IN FACTORY ACCOUNTING

THE characteristic of factory accounting as distinguished from the other sorts already discussed is that most of the cost is exact and can be directly connected with the product, though a considerable percentage--much lower than in transportation, however--is of a general sort and must be distributed to the different items of product on a somewhat arbitrary basis.

The first distinction between the different elements of cost in manufacturing should be between manufacturing cost and selling cost. No relation exists between them. Either the manufacturing division or the selling division may be excellently managed and yet the business as a whole produce no profit. On the other hand, either division may be poorly managed and yet the business as a whole produce a good profit. Only when absolute distinction is made between them is it possible to place responsibility. Let us begin with the producing cost.

Producing cost for each article of product is commonly divided into three parts: first, material; second, labor; third, what is commonly called "burden." Burden is the share of general expenses, such as salaries for superintendence, heat, power, insurance, taxes, etc.,--expenses incurred not for a particular article but for the factory as a whole, so that each particular article gets the benefit. It furnishes an illustration of a pure joint cost, such as was discussed in Chapter X. The cost of material and the cost of labor on each article of product, however, can usually be determined exactly if enough care is taken in keeping the records. We may well begin with these, therefore, which are commonly called prime costs or direct costs.

Our first illustration may be taken from a factory making goods of many types, chiefly on orders. It is obvious that shop foremen must keep records of all materials used and of all labor employed for every piece of work. It happens that in most complicated kinds

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