39. Any system of cost records is deficient that does not provide for the tabulation of all items entering into the cost of individual units or jobs, in such form as will permit of the computation of the total of such costs for comparison with records of total manufacturing expenditures. Three elements enter into the cost of the finished product—material, labor, and expense.
Under the head of material is included the cost of materials of all kinds of which the product is made.
Labor is of two classes, direct and indirect. Direct labor is that which is applied directly to the manufacture of a given article; indirect labor is that which, while necessary to the operation of a shop or factory, is not applied to specific jobs or the production of individual units. In a manufacturing industry operating a machine shop, the labor of machine operators would be classed as direct, while the labor of porters, oilers, and general workers employed in the shop would be classed as indirect. The superintendent of the plant, shop foreman, factory clerks, engineers, firemen, and general workers also belong in the indirect classification. For accounting purposes, indirect labor is divided into two classes—shop indirect and general indirect. Shop foremen and general workers employed exclusively in the operation of a single shop are properly classified as shop indirect, and their wages are charged against the operation of the shop. The superintendent, factory clerks, and general workers necessary to the operation of the plant, whose time cannot be charged against the operation of any one shop or department, are classified as general indirect.
Expense includes all items entering into the cost of the product or the operation of the plant, that are not included in the charge for material and labor. Expense, like labor, is properly divided into shop expense and general expense. General expense includes the cost of all supplies and miscellaneous items of expense incurred in the operation of the plant, which cannot be charged to individual shops. Such items as heat, light, building maintenance, taxes, insurance, and depreciation belong in the classification of general expense.
Any classification of expense items that is not made with reference to a specific plant, must be general; items that in one plant must be classed as general expense, are applied in others as shop expense. The item of power costs furnishes an example. In a plant equipped according to modern engineering ideas, with electrical transmission of power and each machine equipped with its own motor, an exact distribution of power costs to individual shops is a simple problem. The total cost of power for a month is divided among the several shops in proportion to the amount used by each, as shown by meters. Even the hourly cost of power for each machine can then be determined. With a shaft-and belt-driven plant the problem of distributing power costs is less simple. When power costs can be distributed accurately to departments, however, it should be done; otherwise such departments as the drafting room will be charged for power when none is used.
COLLECTING COST DATA
40. For the purpose of making the necessary summaries, complete details of all items of cost for each operation must be collected. This data supplies the foundation for all tabulations of cost statistics.
The first step necessary to insure a record of the cost of manufacture of a given article is the entering of a production order, followed by the necessary shop orders, and the orders of the foremen to the workers. The details of these orders are fully described in another section.
When a foreman receives a shop order, his first duty is to ascertain what material will be needed. He then orders this material from the storeroom, using a requisition as described in the discussion of systems for the stores department.
On receipt of the material the quantity is checked against the foreman's copy of the requisition, which is then sent to the cost department. In the storeroom, the necessary entries are made on the stores records, after which the requisition is sent to the cost department.