To maintain adequate control over production, careful records as to consumption of material and labor must be kept, so that the cause of any marked fluctuations of the costs of the current period from those of former periods can be investigated. The determination of factory cost makes possible a comparison of the policy of manufacturing with that of buying the manufactured article on the open market. This sometimes shows that manufacture is being carried at a loss. Again, the fixing of a sale price on the article, which while covering all expenses, shall at the same time leave a margin of profit, is a prime essential in every business. To be of the greatest advantage and usefulness, cost records should not only determine factory cost but they should accumulate the data needed to predetermine the selling price with accuracy.
Nature of Raw Materials and Supplies
Materials or raw materials constitute the crude commodities or semi-manufactured articles which are to be worked upon and fashioned into a new product. It is seldom that any factory takes its material in the raw form in which it comes from nature. The product of the mines goes through many degrees and stages of refinement and at each stage of the process some of it becomes the “raw material” for another class of industry. The term is therefore relative; that which is the finished output of one factory becomes the raw material of another factory, to be worked upon and given new forms.
Auxiliary material and supplies are also made use of. Thus, certain parts such as screws, bolts, hinges, casters, fastenings, trimmings, and the like, are incorporated into the finished product without change of form or the application of any labor thereto. These also constitute a part of the raw material of the factory, their value as finished product being due to place utility rather than form utility.
Supplies are to be distinguished from raw materials. This also is a relative term. In general, material which does not directly form a part of the finished product is carried under the head of supplies. Materials used in getting ready or seasoning the raw material, i.e., auxiliary material, such as paint, putty, etc., the quantity of which used on each piece of product cannot be measured with exactitude and must therefore be spread over the entire product—these and similar items constitute manufacturing supplies. They are usually treated as a part of factory expense rather than as belonging to prime cost.
There are also factory operating supplies. These comprise the materials used in the operation of the factory. Repairs material, brooms, oil, waste, packing, nails, fuel, etc., are examples of this kind of supplies. These, of course, are classed with factory expense, also.
The raw material which enters into prime cost is thus seen to be only that which can be charged directly to the particular product. All other material is overhead or expense.
Accounting for Material Cost
The problem of applying the cost of the material directly to the job is largely a problem of systematizing which requires the careful oversight and accounting for all materials bought and used in manufacture. Two general methods are employed. Under the one, the old method of keeping record of all purchases and taking the inventory periodically to determine how much material must have been used in the processes of manufacture, is deemed sufficient. In a small factory making just one product—or a few simple products—where the conditions are such that the manager has an intimate knowledge of all processes and can exercise personal control over them, fairly satisfactory results may accrue under this method, though the amount and therefore the cost of the material consumed in the product can never be known accurately until the inventory has been taken.
The other method requires almost as accurate accounting for material as for cash. A stores room or department must be established and a stores ledger installed. As materials are purchased and come into stores, they are classified in whatever detail is desirable and charged to their respective class accounts kept in the stores ledger. As material is needed for manufacture it is drawn by properly authorized order on the stores-keeper. These orders are called “requisitions” and indicate the material needed and the job or product to which it is to be charged. The requisitions constitute the source of the credit entries to the various stores ledger accounts as well as the charges to the job or product. The balances on the stores ledger accounts thus show the amount of each class of material which should be on hand in the stores room.