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LIBRARY

Cost Accounting Reports for Executives

N. A. C. A. BULLETILVSection I

Vol. VII, No. 24 August 15, 1926.

Cost Accounting Reports for Executives

By

E D G A R S W I C K

Wor thi ngt on Pu mp & Ma c hin er y C orp . ,

Cincinnati , Ohio.

Pu bli shed semi - monthly by the National Associa tion of CostAccou nta nt s , 130 W e s t 42nd St r eet , N e w Y ork . Su b-

scr ip tion price, $15 per year . Ent er ed at the Po s tOffice, N ew York, N. Y., as second -class ma t t er .

The National Association of Cost Account-ants does not stand sponsor for views expressedby the writers of articles issued as Publications.The object of the Official Publications of theAssociation is to place before the membersideas which it is hoped may prove interestingand suggestive. The articles will cover a widerange of subjects and present many differentviewpoints. It is not intended that they shallreflect the particular ideas of any individualor group. Constructive comments on any ofthe Publications will be welcome.

Additional copies of this Publication may beobtained from the office of the Secretary. Theprice to members is twenty -five cents per copyand to non - members seventy -five cents per copy.

COPYRIGHTED BY

NATIONAL ASSOCIATION OFCOST ACCOUNTANTS

AUGUST 15, 1926

National Association of Cost Accountants

EDITORIAL DEPARTMENT NOTEFormal reports play a most important part in keeping the executive

informed as to the results and trends of his business. Without them heis dependent upon either oral statements of subordinates, his own personalcontact with the various phases of operation, or on intuition. Modernlarge scale production cannot long be carried on without a well developedsystem of formal reporting. Reports, as one meets them in actual use,are of all kinds and characters —some good, some bad, and many very in-different. For the most part too little time and attention are given toworking out a real system of reports suitable to a given situation. Re-port making needs careful control as well as other phases of businessoperation.

Our current publication deals with some of the uses of reports andmakes valuable suggestions as to points to be observed in drafting them.

The author, Edgar Swick, is well equipped, because of his breadthof experience, to speak of this subject. He was born in New Jersey,not far from New York City and was educated in the public schools ofhis birth place. After graduating there he attended schools in Trenton.Since completing his scholastic training he has been engaged in cost ac-counting, purchasing, production, building construction and several otherphases of business activity.

From 1918 he spent several years with his company as travelingauditor on cost systems and factory accounts, with over two years inFrance. At the present time he is office manager at the Laidlaw Worksof the Worthington Pump and Machinery Corporation, Elmwood Place,a suburb of Cincinnati, Ohio.

He is a member of the Board of Directors of the Cincinnati Chapterof the National Association of Cost Accountants and presented this paperbefore a meeting of the Cincinnati Chapter, January 29, 1926.

COST ACCOUNTING REPORTS FOR EXECUTIVESIn discussing tonight the subject of Cost Accounting as an Aid

to Management, I do not believe I am going to say anything thatmost of you do not already know, but I hope to treat the subject ina way that will perhaps lead you to think of some of the variousfeatures of the subject in a new light.

How the cost accountant can be an aid to management, outsidethe usual practice of supplying a statement of the profits or losses,is a question to which I believe, we should all give careful study.No doubt you will agree with me that as a general rule managementdoes not ask for very much aid from the accountant outside of aprofit and loss statement, when profits are good; but in these daysof high costs and close competition I believe good profits are not therule except in businesses where costs are closely analyzed andstudied and that the functions of the cost accountant are becomingmore and more important every day.

The most important part of the cost accountant's work is inthe preparation of reports. In our business we make reportsmonthly, which I assume is done by most of you. After these re-

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por ts are made, accurately balanced with the books, and cor rect lytyped, are they closely examined by the managemen t or do they getplaced in a file and left there? I have heard a lot about present ingrepor t s wi th a le t ter cal ling a tten tion to specific poin ts and fea-tur es , but how man y t im es ar e these th in gs merel y gla nced overand laid aside.

The ma in poin t I wan t to br i ng ou t i s t ha t a fter you pr esen tyour r epor ts a n d t h ey a r e received with a m er e formal "T h an kyou," or , as is sometimes the case, just a grun t, do you become dis-couraged? I would say you should not , but ra ther you should studyyour genera l manager , presiden t or board of di r ector s as the casemay be, and find out just how these r eports should be made up andpresen ted to a t t r ac t th ei r a t t en t i on . I t h a s been my exper ience,and I bel ieve the exper ien ce of mos t of you that the accoun ta n t ' seducat ion and t r a ining di ffer s so much from the t r a in ing of otherexecutives that it is practically impossible for an accountant topresen t a r epor t th a t wi l l in terest an engineer , sa les ma nager , orproduction man, unless he studies the individual to whom he ismaking the r epor t . The t r a in ing of the above types of execut ivesleads them to look a t the r esul ts of the bus iness from an en t i r elydifferent angle from that of the accountan t.

In our business I deal more di rect ly wi th the works manager ,but at the same t ime I have to prepare our reports along prescribedlines to be sen t to our head office a t New York. I believe we haveone of the best set of r epor ts for ou r l ine of business I have everseen , yet I have known works manager s to whom those repor tswere on ly a scrap of pa per . Wh y? Because t hey were designedmore or less by t he accoun ting departmen t , and to the managerth ey were more or l ess a jumbl e of fi gu r es . The r epor ts, wh ichare not sta ti stica l, must be made in order that a balance sheet canbe prepared showing profits and losses, and I believe the accountantshould learn what the manager, the sales depar tment, the engineer-ing, and the production department require, and keep his records insuch shape that he can prepare analyses and statements a long lineswhich wi ll bring out to these executives features which they shouldknow and wan t to know, r a ther than be just an "Ar i thmet ic Guy,"a name given to a cost accountant by one of our managers. Some-times I think it is necessary to educate executives to understand theaccoun ting and financial r epor ts. Th is i s r ather a difficult diplo-matic problem, which requires different tr ea tmen t in each andevery case, and I am not going to a ttempt to tell how to go about it.I myself have not as yet learned how to be enti rely successful a longthese lines.

One pol icy which I adhere to st r ict ly, i s to give the manage-men t my t ime whenever r equested , whether day or n igh t , even tothe exclusion of per son al mat ter s a t t imes, as I ha ve a l wa ys fel ttha t the impor tance of the accoun tan t i s never r ea l ly conceded inthe mind of many execut ives. Never theless, in a business wherethe account ing is looked after by some member of the firm who isnot an accountan t , or by som e c lerk or bookkeeper not a t r a in ed

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accountant, I believe you will find a concern with whom it is difficultto do business. Collections are slow, statements are incorrect, andusually their profits are small.

When profits are small, or when there are none at all, is thetime when the accountant can bring his "red tape" into play andperhaps save the day. This can oftentimes be accomplished in thefollowing manner:

1. By providing a proper material control.2. By recording indirect expenses or overhead in such a man-

ner as to be readily analyzed.3. By keeping such detailed costs as will permit their study

with a view to determining whether costs are higher thannecessary, and by furnishing comparative information tothe production department with the least possible delayafter the completion of the work.

4. By providing the sales department with information show-ing which lines are profitable and which are not and alsoby furnishing data on which to base prices for new businessor new lines.

Costs are also useful at times to the engineering departmentas a guide in making up designs of new lines of manufacture orwhen enlarging on the lines already manufactured.

Consider the question of material control. In our business wecarry a complete stock ledger. That is to say, we carry an indi-vidual ledger card carrying the quantity on hand and also the valueof the material. This ledger is tied in with the general accountsunder the perpetual inventory system. No material is given out ofstores for any purpose without a proper disbursement ticket beingturned over to the storekeeper for the same. This ticket is pricedfrom the value on the ledger card and is then passed through thecontrol accounts as a credit to Stock, and a charge to Work inProcess, or Indirect Expense, as the case may be. The value of thedisbursement ticket as a waste preventive, I can illustrate by anexperience I had while located at one of our company's factoriesfor the purpose of restoring a run -down system.

As everyone knows, electric light bulbs in most lines of busi-ness, are never used for anything other than maintenance and arecharged as an expense item. At this plant due to the fact that thesebulbs were always purchased for factory lighting, which is an ex-pense, it was considered useless to turn them over to the control ofthe store room when purchased in quantities and waste the time ofsome man to write a disbursement order, give it to the store roomto get the lamps and also waste the time of the stores ledger clerkin making the entries. Therefore, in this plant when lamps werereceived, they were delivered direct to the shop electrician and werecharged to Indirect Expense immediately.

Upon taking charge of the work at this plant, I insisted thatthese be put under the storekeeper's control. I met all sorts ofobjections to this. By taking all of the invoices for these lamps for

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the p revi ous year Y foun d t h at we h a d purchased approximatelyten t i mes t he qua n t i ty of la mps n ecessary for t ha t p lan t . I g iveth is one i tem as an i l lust r a t ion , but there were hundreds of i temswhich had been handled in the same way. The resul t of placing alli tems of supp l ies un der th e con t rol of the st ockkeeper when pur -chased in quantities and of disbursing them from stores as required,enabled us to reduce our Indirect Expense approximately one -third and gave us complete con trol of the quantit ies purchased.

The con trol of the quan t i t ies purchased is an other impor tan titem. The huma n memory is a f ickl e th ing and when memory isdepended upon to know what quan t i t ies have been used for a cer -ta i n per iod i n or der t o det erm in e fut ur e r equir em en ts th e wrongquantity is usually ordered. And generally the quantity is too largera ther than too small . With a proper ly kept stock ledger card, weeliminate the guess work.

Some quest ion the di fficul ty of keeping these ledger s accurateas to quantities on hand. While there is always presen t some error ,I firmly believe that an inventory taken from a properly kept ledgeris far more accurate than a so- called "actual count," wherein every-body from the office boy to minor execut ives i s ca lled upon once ayear at inventory time to count stock without any prepara tory prac-tice whatever . If som e of you wh o ma y th i nk such a coun t er i saccurate wi ll go home and count a couple of hundred beans I thinkyou will make several counts before you arr ive at the same quan titytwice. I remember seeing coun ts ma de wh er e t he counter cameupon a large quanti ty of pieces in a bin. Being somewhat lazy, hemarked a quan t ity on his inven tory sheet without counting thepieces, and said "I f a n yon e doesn ' t be l i eve t h at i s r i gh t l et h i mcoun t them himself. "

The stock l edger i s a lso used by t he product ion depar tment .When an order is received for a complete machine that is notcarr ied in stock, and must be buil t, i t goes fir st to the engineer ingdepar tment to be designed and a speci ficat ion or bi ll of materia l isissued. Th is bi l l of mater ia l then passes to the stock depar tmen tto be checked with the ledger s to determine what mater ials are onhand, ei ther rough or finished. Aft er t h is h as been n ot ed on t hebi ll of material i t is passed to an order depar tmen t, where r equisi -tions are issued to t he purchasing depar tmen t for any materialnecessary to be purchased. Orders are i ssued to the foundries andshops for t h e par ts to be manufactured, and disbur semen ts areissued for the materials to come from stock. Here we eliminate thet roubl es had in ma ny or gan iza t ions where th e order in g of par t s,etc., i s left to the various depar tmen t heads. Here, when the finalassembly is being made i t i s so often discovered that someone hmneglected to order some smal l part , wh ich perhaps r equires a weekor ten days to get through the shops, wh ich causes a holding up ofthe assembly of the machine. Or th is often r esul ts in a breaking upof t h e ent ire rout ine and production schedule to rush the pieceth rough in two or th ree days. Th is, of cour se, is a lways very ex-

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pensive. This may not apply with equal force to a retail or a whole-sale buinesss, but I am sure a proper control of stock is very essen-tial to eliminate wastes and locate pet ty pilfer ing etc. We a ll knowthat in many lines of business i f the cashier is short a few pennies,it i s a fixed policy that he must find them; whereas valuable stocksof supplies and salable merchandise can be used, lost, or disposed ofwithout any check whatsoever being had. When the annual inven-tory is taken, there i s a wri te -off to be made of many thousands ofdol lar s, and no one knows just why. Would i t n ot seem r a t h err idiculous to take an inventory of the cash but once a year? Yet, ineither case, we are dealing with dollars or their equivalent.

For the benefit of our executives and the general purchasingagen t , we divide our stock into eighty -one classifications such asfinished machines of different types, finished parts, rough castings,purchased parts, differen t r aw materials, supplies, etc. At the endof each month a report is made showing in dollar s the quan ti ty onhand, the quan t i ty placed i n stock dur ing the mon th , t he amoun tdisbursed dur ing the month, and the balance on hand a t the end ofthe mon th. From th is r eport the executives can see what the turn-over amounts to and can determine whether or not the stock carr iedis gr eater than necessary for the a moun t of business being done.The natura l tendency in corporations where the owners do notassume per sonal control is to carry a stock too large thereby tyingup capi ta l which could have been wel l used for other purposes.

I know of on e cor por at ion whi ch ha d no such stock control.During the year s of 1916 and 1917 when metal products were get -ting difficult to procure, practically every storekeeper —of whichthere were several , because of the necessity of having a store roomin each of the large cities and in five large plants —began to requisi-tion large quan ti ties of materials. These requisit ions were passedby the general purchasing agen t and the order s placed without anydefini te knowledge of the normal quan ti t ies used. When the bil l scame in for the bulk of this mater ia l, they suddenly found they didnot have sufficient funds to make payments. Th is corporation wasmaking good profi ts at the t ime and was very prosperous. In orderto pay for these ma ter ia ls, i t was necessary t o bor row. The bor -rowings became so great that the banks began to be fr ightened. Atabou t t h i s t im e, th e m an wh o h ad been pr es i den t for m or e t ha ntwen ty year s r esigned and was r eplaced by a new presiden t . Per-haps th is was not the cause of the presiden t ' s r esignation but I dokn ow t h at a ser i ous at t em pt was ma de t her ea fter to establish amaterials control.

Consider the question of expenses. Are we recording these insuch a way as to al low for complete analysis when necessary? Canwe show the m anager or th e other execut ives wh ich depar tmen tsare becom ing more and more expensive per productive hour , orother product ive un i t , or wh ich items of expense in these depar t -men ts are exceptionally large? Valuable informat ion can be com-piled for the management showing expenses per productive hour or

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productive unit divided between fixed and controllable charges. Thefixed charges per un it of product ion are bound to go up or down ina r ever se ra tio to the volume of business, but with perfect manage-men t the control lable charges per productive uni t should always bethe same. A char t showing the tr end of these charges shows man-agement a t a glance whether or not expenses are proper lycontrolled.

Ca n we g ive th em repor t s to show these va r ious items eachmonth —types of report which will bring out these points in such away that they wi ll not have to spend hours por ing over masses offigures? When high points are found, can we give a completeanalysis of the bad spots, showing the cause? I believe we can, andwhen this is done the management will without doubt find a remedy.A very important considerat ion in th is connection is to get th is in-formation to the management while it is still fresh and the situationcan be remedied before the loss becomes too great. If we do not dothis the trouble i s bound to be discovered some t ime, but usually itis too la te to save a disaster .

Referr ing to the question of keeping costs, all of us do more orless work keeping and compiling costs. It i s absolutely necessaryin a manufacturing business to compi le costs in some form in orderto determine profits or losses and to calcula te the value of fin ishedproducts on hand. Even with so- called "standard costs" some costcompi la t ion mus t be done, and for these purposes a test depart -ment must be main ta ined. Since we must have some clerica l forceto do that which cannot be dispensed with, i t seems good policy tomake a slight addit ion to th is force and compile some data for themanagemen t, such as t o sh ow t h e t r en d of costs from month t omonth , to show whether a cer ta in opera tion costs more to per formth i s mon th th an i t cos t la st m on th or th e last time it was per-formed ; and to det ermine just how t o presen t th is in format i on toyour management in order to tell i ts story most effectively.

It has been my experience wi th manager s of mach inery manu-factu r i ng p la n t s th a t t hey do n ot a ppreci a t e th e am oun t of workdone by the clerical force. How can you expect them to appreciateit when all they get from the clerical staff may be one or two sheetsof paper each month showing the profi ts or losses?

In our wor k we com pil e a cost r ecor d showing the completedeta ils of the cost of manufactured par ts, from the raw mater ial tothe fin ished part . This includes a record of th e ma ch i n e or m a -ch i nes on whi ch th e work is done, t he ch eck num ber of the m anwho per formed each opera t ion , the t ime r equired, and the moneycost. Th is cost r ecord is not made for every order in cases wherewe run one or two lots of the same part per month, but a sufficientnumber of these orders is r ecorded in th is way to give a good com-parison of costs of or der s and to show the tr end. When theserecords show a cost to be out of line with a previous cost the record,which is kept in a loose leaf binder, is laid on the manager 's desk —a complete story wi thout any further explanat ion. He can immedi-

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ately call on the department heads for an explanation and applycorrective measures where necessary.

These records are also valuable for use when making estimates.It may be that two or three years ago a certain large machine wasbuilt. Today the sales department has an inquiry for a duplicate.Since the time when the machine was built, prices of materials andlabor may have changed. What shall be our selling price of today?The previous cost has no value for this purpose because no one candetermine accurately the percentage of change in the cost due tothe many elements in it. From this cost record, however, we canprepare for the est imating department in a very shor t time theweights and kinds of material and the hours of labor necessary tobuild this machine from the raw material to the finished product.To these data we may apply current prices and burden, and so knowwithin very narrow limits what our present day cost should be tobuild a duplicate.

To sum up, I should like to emphasize two points.1. Do not keep or compile a lot of records which are never

looked at or are seldom referred to.2. Study the various executives to whom reports go. Find out

exactly what is wanted and in what form. Then, give all the infor-mation possible from the records. Be careful, however, not toburden the executive with unnecessary detail.

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Vol. I VN o. 11 —Cost Acc ou nt in g in t he T ool S te el I nd u s t r y , John J. KeefeNo. 18 —Cost Accou nting for Self La yi ng T ra ck T ra ct or s , Percy EhrenfeldtNo. 19 — Paper s a nd Discu ssions —Thi rd N ew Engla nd Regiona l Cost Conference

Vol. VNo. 9— Gett ing the Most Ou t of Bu siness Records, Matthew L. CareyN o. 1 0 —T h e Ex pense of Power a nd Bu i l d ing Serv ice , James P. KendallNo. 11— Indirect La bor , Harry J. OstlundNo. 16— Budgetary Control, William CarswellNo. 17 —A Fou nd ry Cost System, Machinery Builders' SocietyNo. 18— Methods of Su pplying Cost Informa t ion to Fo re m en , Hugo DiemerNo. 19 —Cost Accou nt ing in a Metal S ta mping Pla nt , E. H. lVildtNo. 20—Use of Accou nt ing Informa t ion and Statistica l Da ta in a D e pa r t me nt

Store, A. C. HodgeNo. 21 —A Basis for Cost Accou nt ing in Ba nk s, Gordon WilsonNo. 22— Importance of the Cost of Id leness in Equ ipm ent Indu str i es , E. F.

Du BrulN o. 23— Controlling the La bor , W . O. Cutter and others

Vol. V INo. 1— Execut ive Uses of Cost s, Howard BerryNo. 2— Operating Ra tios a nd Costs a s Guides to Ma na geme nt , Urban F.

von RosenNo. 3 —T he Use of Bu dge t s in Redu cing O verhea d, Ray W. DarnellNo. 4— Distributing the Overhead, Nelson J. BowneNo. 5 —Cost Accounting i n the Domesti c Beet Su ga r Indu st ry , F. L. CrawfordNo. 6—Co- operation Between the Compt rol ler a n d t h e Engineer , Major J. W.

SwarenNo. 8 —The Administ ra t ion of the Bu dget , Harry C. SenourNo. 9— Admini st r a t ive a nd Sel ling Cost s , T hei r N atu re a nd Distr ibu t ion , W. H.

Higginbotham and Andrew StewartNo. 10— Pricing the Inventory , W . F. ViehNo. 11 —Profi t Sha ring as a Method of Compensat ion, Professor Ralph E. HeilmanNo. 12— Overhead Du r ing Low - Volume Product ion, A. F. Stock and J. M. CoffeyNo. 14—The Ma na gem ent Fu nct ion in Business, J. Gordon SteeleNo. 18—The Indust ri a l a nd Statistica l D e pa r tm en t of a Mod ern Bank, F. W.

ShibleyNo. 19 —How Can Cost W o r k Be Simplified Wi t ho u t Impa i r ing Accu ra cy,

F. H. CorreganNo. 20 —Costs F o r Oil Produ cer s, R. W. CobbNo. 21 —Cost Accounting a nd Foremen 's Depa r tmental Act iv it i es , T. M. McNieceNo. 22 —Cost Accounting in the Lu mb er Indu st ry , A. J. CarsonNo. 23 —The H u m a n Element in Materia l Cont rol, Charles A. WilliamsNo. 24— Control of Stock s of Mercha ndi se , Herbert C. Freeman

Vol. V I INo. 1 —A System of La bor Cont ro l for Pa yrol l and Cost Pu rposes, Peter C. JungNo. 2 —The Prep a ra t ion a nd Control of a Bu dget , J. R. TobeyNo. 3 —The Cost of Distribu tion, A. E. GroverNo. 4— Production Bu dget ing , J. L. PalmerNo. 6—A Ba nk 's Relation to the Pro ble ms of Vested a nd Work ing Capita l,

H. 1. Shepherd and Walter E. Johnson, Jr.No. 7 —How to Redu ce the Cost of Selling, A. G. FrostNo. 8— Various Wage - Systems in Rela t ion to Indi r ec t F a ct ory Charges, R. R.

ThwmpsonNo. 9 —The Prepa ra t ion a nd Admini s t r a t ion of Bu dget s , Chester E. WegerNo. 10 —Brush Ma nufa ctu ring Costs, Norman H. BroadheadNo. 11— Inventory Accou nt s a n d t h e Genera l Accou nta nt , Arphoxad FoyNo. 13— Forecast for 1926, Carleton B. HutchingsNo. 14— Engineering Costing a nd Wo r k s Accountancy —Its O bject s and

Necessity, Roland DunkerleyNo. 15 —Cost Su mma r ies a nd Procedu res in I ce Crea m a nd Ca ndy Ma nu fa ctu re ,

E. J. AtkinsNo. 17 —Cost a nd Deprecia tion, Carl G. JensenNo. 1 9 —Som e Prob lems Co nnecte d Wi th Bra nch Accou nt ing, Cecil S. AshdownNo. 20— Distr ibu ting Administra tion Cost s, Leon E. VannaisNo. 21 —Use of Sta nda rd La b or Cost s in the Ma nu facture of Men 's Clothing,

E. C. RobertsonNo. 22— Budgets and Pre - Determination of Costs, William S. KempNo. 23— Distribution of Burden, Grant L. BellN o. 24 —Cost Accou nting Repor t s for Execu t ives, Edgar Swick

Copies of the above publications which are not out of print may be obtained from the officeof the secretary of the Association, 130 W. 42nd Street, New York City, at the price of 75 centsW copy.