Cost accountants and engineers have worked out this percentage on the basis of various elements of cost, as direct labor, material, machine hour, man hour, or a combination of two or more of these elements. The exact method used, which must be adapted to the conditions existing in the individual factory, does not enter into this discussion.
Since there are numerous items of expense of the character referred to, it is customary to group them, for purposes of cost computation. Sometimes all such expense items are grouped under the one head of General Expense. It is by means of a controlling account in the private ledger, that the distribution of expense is made, thereby keeping private the exact cost of manufacture.
The known cost of a certain job or article—the cost of material and labor—is frequently referred to as the prime cost. The duties of the cost clerk may end with determining the prime cost, his computations not including expense items.
The total cost of material and labor for the month is charged to private ledger account, material and labor accounts receiving proper credit. The exact amounts of the various items of expense for the month are also charged to private ledger account, with credits to expense accounts.
In the private journal, these items are charged to various controlling accounts, and credited to the general ledger controlling account. The usual entries are:
| Manufacturing Account | $______ | ||
| General Ledger | $______ | ||
| For material | $______ | ||
| For labor | $______ | ||
| Expense Distribution | $______ | ||
| General Ledger | $______ | ||
| For rent | $______ | ||
| For power | $______ | ||
| For repairs | $______ | ||
| Etc. | Etc. | ||
The percentage of expense for the current month on whatever element based, has been determined from the actual results of the preceding month. To illustrate, we will suppose that expense is apportioned on the basis of direct labor; the cost of this item during the month was $1,600.00, and the amount of expense charged to operation of the plant during the same period was $240.00;—which gives us a ratio of 15%.
We wish to determine the cost of jobs as they are completed during the current month. The records turned in by the cost department give us the actual cost of material and direct labor, but not knowing the exact ratio of expense to direct labor for this month, we use last month's ratio, and add an amount equal to 15% of the known cost of direct labor. When the actual results for the month are determined it is quite probable that the ratio will vary from last month's record, as either factor may change. It will be necessary to adjust this difference, which is the reason for an expense distribution or expense adjustment account in the private ledger.
By keeping the expense controlling account in the private ledger, the principal can keep private, not only the actual cost of an article, but the percentage of expense and the basis of the expense apportionment. If thought desirable, he can add further amounts for the purpose of establishing a selling price.