57. Routine Followed. The notes following the names of the accounts in the above schedule explain their purpose and show clearly how charges are made direct to the expense accounts. Further explanations are necessary in regard to charges and credits to manufacturing account.
Labor is easily disposed of as the amount standing to the debit of labor account at the end of the month is transferred to the debit of manufacturing account, closing labor account.
Material charges are more difficult to handle. In all well-regulated factories all material is as carefully accounted for as cash. Proper storage rooms are provided in which all material is stored. These rooms are placed in charge of a man known as stockkeeper or stores clerk, and no one is allowed to take material from the storerooms without first presenting a written order, signed by the foreman, showing for what purpose the material is to be used. This order is retained by the stockkeeper and after he has posted the material to his own records he sends it to the bookkeeper. From these orders, the bookkeeper compiles a record of material withdrawn and, at the end of the month, the amount is debited to manufacturing account and credited to material purchases.
The stockkeeper keeps a record of all material received and delivered and the balance of his accounts shows the quantities of the different materials which he should have in stock. His record should agree with the balance of material purchases account.
When a stockkeeper is not employed it is necessary to have reports from the factory. The bookkeeper should arrange to obtain daily reports from the foremen showing all materials taken into their departments which are to be used in the manufacture of the regular product. If any of this material is to be used for the manufacture of tools or patterns for use in the factory, or for repairs to tools, patterns, machinery, or buildings, it should be noted on the report with a statement of the exact purpose for which it is intended. From these reports, the bookkeeper will compile his material records which will be credited to material purchases, and charged to manufacturing account and the different repair accounts at the end of the month.
Supplies are handled the same as materials, except that where this is a small item it is sometimes treated as an expense account. Where a considerable value is involved it is preferable to consider it as a subdivision of the material account.
The expense accounts must be charged on a percentage basis for the reason that the amounts actually expended vary in different months, and an expense item paid in one month may cover that particular expense for an entire year. Such items are insurance premiums and taxes, paid once a year to cover twelve months. Other expense items like experimental, power, and repairs are difficult to determine for a single month. It is customary to base the charge for these items on the records for the previous year. The amount of such expenses for a year is divided by twelve and each month one twelfth of the amount is charged to the manufacturing account and credited to the expense account. If there is any discrepancy at the end of the year it is adjusted by a debit or credit to finished goods.
Reports should be made daily by all foremen showing exactly what partly finished goods are received in their department and the quantity delivered to the next department. A record of these reports should be kept, which will show at all times the quantity of goods in process in each department. Reports of finished goods received in the stock room will show the quantity manufactured, or rather finished, during the month. See report form illustrated on page 53.
If all goods on which work had been started were finished, the charges to manufacturing account would represent their exact cost, but there is always a certain quantity of goods in various stages of manufacture, and the amount already expended on them must be considered. Therefore an inventory is taken of goods in process. Great care must be exercised, in taking this inventory, that too high a value is not placed on partly finished goods, for if the valuation is too high the apparent cost of finished goods will be less than actual cost. It is of utmost importance that the cost of manufacture be not understated, for it is on this cost that selling prices will be based. This is one reason why some manufacturers add a small-factory profit. Unless a complete system of cost accounting is maintained, this inventory of goods in process must be an estimate, but the record of goods in process in each department will be of considerable assistance in making the estimate.