CONTROLLING ACCOUNTS
49. Certain controlling accounts are required in the general ledger to complete the connection between the cost and general accounting system—to bind the two together. These controlling accounts, which absorb all of the elements of cost from month to month, furnish the means of proving the accuracy of cost figures; they change the cost system from single entry to double entry.
Two controlling accounts are necessary—Manufacturing and Expense Distribution. The former finally absorbs the latter and is, therefore, the principal controlling account.
One manufacturing account may represent the entire product of the plant, or there may be several accounts representing different classes of goods, or departments of the business. In machinery manufacture, the foundry is frequently treated as a separate business; in the manufacture of knit underwear, the yarn and knitting mills are operated as separate plants; in a harness factory, separate accounts are kept of the manufacture of harness, collars, and saddles. Each of these divisions, whether departments or kinds of goods, calls for a manufacturing account.
Expense distribution is subdivided in every business having more than one department or shop. The subdivisions of this account are General Expense Distribution and Shop Expense Distribution, an account with the latter being kept for each shop.
The sources of charges to manufacturing accounts are reports of material issued to the factory on production orders, Fig. 9, reports of direct and indirect labor employed on production, Fig. 12, and the expense distribution accounts. Credits to manufacturing accounts are derived from reports of finished jobs, as in Fig. 21.
The sources of charges to expense distribution accounts are: reports of material issued to the factory to be used for repairs, Fig. 9, reports of supplies issued, Fig. 11, reports of labor employed on repair jobs, Fig. 12, and the different accounts covering expense items that must be apportioned. A credit to expense distribution account, with a corresponding charge to manufacturing account, closes this account monthly.
50. Controlling Account Entries. The accuracy of the entries to controlling accounts in the general books is of the utmost importance. Upon them depends the proof of accuracy of the cost figures of the cost department on individual jobs.
Material and labor costs are accurately determined. The value of material drawn for all purposes, as shown by the report in Fig. 9, is credited to material purchase accounts, and these accounts are checked against the storeroom records. Reports of supplies drawn are handled in the same manner. The labor report, Fig. 12, covers all labor charges and must agree with the pay-roll for the period covered.
In the distribution of expense, however, there are many opportunities for error. While the total expense to be charged against the factory for a given period is accurately determined, the amount is not known until the end of the period. This is represented by the amounts charged to the different expense distribution accounts. In the meantime, to determine the cost of individual jobs, it is necessary to apportion expense on a percentage basis, as explained in the discussion of that subject. Since that ratio for the current period is unknown, it is necessary to assume that the actual ratio for the preceding period still is correct; therefore, that ratio is used in figuring the cost of all jobs. It is only when the expense distribution for the current period is made on the general books and the true ratio determined, that discrepancies, if any, are discovered. Unless the distribution is accurate, the resulting ratio will be incorrect.
GENERAL OFFICES OF THE PLATT IRON WORKS, DAYTON, OHIO
Formerly, it was the custom to base the expense ratio on the actual figure for the preceding year, which meant that changes in expense ratio were not taken into account for an entire year. As a result, the total manufacturing cost shown by the books at the end of the year, did not agree with the costs as figured in the cost department; it was usually much higher.
By operating the controlling accounts, making accurate distributions of expense, the period can be limited to one month. Discrepancies are then quickly discovered and the necessary adjustment made in the expense ratio used. If it is found, at the end of the month that the true ratio of expense is higher or lower than for the preceding month, the percentage to be used for the next month is raised or lowered accordingly. With a careful distribution of the expense items each month, the variations in the ratio should be very slight.
The objection is sometimes made that a monthly distribution of expense is inequitable—that certain expenses may be abnormally high in some months and below the average in others. But with proper controlling accounts, this objection ceases to be serious. Certain expenses are paid in one month that should be distributed over an entire year—as taxes, insurance, and repairs. The amounts charged to the expense distribution accounts each month, are only the amounts that should be apportioned to that month. Taking taxes as an example, one-twelfth of the entire amount should be charged each month.
As an example of adjusting entries for controlling accounts, journal pages are illustrated, in Fig. 21, containing entries made at the end of the month—with explanations. It will be noted that the last entry is a charge to manufactured goods account, and a credit to manufacturing account of the total cost of finished goods, as shown in the report, Fig. 20.
This account, manufactured goods, occupies the same position as a purchase account. It represents the cost of finished goods to the commercial division of the business. To this cost must be added an amount sufficient to cover selling expense and provide a profit, as is done when goods are purchased for resale. Selling expense should not be included in the cost department's figures; nothing should be added to the actual cost of manufacture, unless it is desired to add a small amount to provide a factory profit.
Fig. 22. Journal Showing Adjusting Entries
Fig. 23. Journal Showing Adjusting Entries
Manufacturing account has been charged for the cost of manufacture—material, labor, and expense—and credited with the cost of finished goods. This does not close the account, however, because all jobs started have not been finished, as there still is work in process. The balance of the manufacturing account, then, represents the cost of this work and should agree with an actual inventory of work in process.
No attempt has been made to describe a cost system for a particular business—principles only have been considered in this discussion. Proper application of these principles, however, will result in a practical system for any manufacturing business. The exact manner of applying these principles—the detail—depends on the nature of the business; the results desired are the same in all lines. Physical conditions, nature of the product, the policy of the management, the manner in which the business is conducted—all of these factors must be studied and given due consideration in outlining the system. Then the most simple system that will produce results is best, but in the effort to make the system simple, necessary details should not be overlooked. It must be remembered that in a comparison of details of cost, increases are more quickly located than if the comparison refers to finished work.
PART OF THE INTERIOR OF THE GENERAL STORES OF THE SANTA FE AT TOPEKA
Showing Arrangement of Racks and Shelving for Holding Materials, and Longitudinal Disposition of the Bins Enabling the Foreman, from His Office at the End, to Command a View of the Whole Floor. Courtesy of the Engineering Magazine.