PP IN

NATIONAL ASSOCIATIONof

COST ACCOUNTANTSAffiliated wi th T h e Ca na dian Society

of C os t Ac co u n ta nt s

Official Publ icati ons

Vol. V Ma rc h 1, 1924 q R yC \

Ac c u m u l a t i n g t h e Over -h e a d

BUSH T E R M I N A L BU I L D I N G130 WEST 42nd STREET. NEW YORK

N A T I O N A L A S S O C I A T I O N OFC O S T A C C O U N T A N T S

Affiliated wi th The Canadian Society of Cost Accountants

Off ic ia l P ub l ic a t io ns

Vol. V. No. 12 March 1, 1924

A c c u m u l a t i n g t h e O v e r h e a d

A L B E R T V. B R I S T O L

Amer ican H a rd Rubber Company,

New York City

BU S H T E R M I N A L B U I L D I N G130 W E S T 42nd S T R E E T , N E W Y O R K C I TY

The National Associa tion of Cost Account-ants docs not stand sponsor for views expressedby the writers of articles issued as Publications.The object of the Official Publications of theAssocia tion is to place before the membersideas which it is hoped may prove interestingand suggestive. The arti cles will cover a widerange of subjects and present many differentviewpoints. !t 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 offi ce of the Secretary. T heprice to members is twenty -five cents per copyand to non - members seventy -five cents per copy.

COPYRIGHTED BY

N A T I O N A L A S S O C I A T I O N O FC O S T A C C O U N T A N T S

MARCH 1, 1924

National Association of Cost Accountants

ACCUMULATING THE OVERHEAD'

The prepara t ion of th i s a r t ic l e h a s i m pr essed upon m e mor ethan ever before the close r ela t ionsh ip between "Accumulat ing theOverhead" and "Dist r ibut ing the Overhead." In many cases I havefoun d t ha t t he a nswer t o "How t he Over head Sh ou l d be Accumu-la t ed" m us t be determi ned by th e use m ade of t he over head in i t sdist r ibution . I decided, therefore, i t wa s best t o give both sub-jects thei r relative consideration and then eliminate all ma t t erst r ict ly r ela ted to "Dis t r ibut ing the Overhead."

DEFINITIONS OF TERMSThe cos t syst em of a m a nufa ct u r i n g con cer n should serve a

twofold purpose, namely, to show the cost of manufacturing by con-t rol la ble gr oups, an d t hen to sh ow how t hat sa me cost affect s t heval ue of the pr oduct made for sa l e. To do t h i s t h e r ecor d of t h ecost of overhead must be compiled, fi rst, to show its con trol labi l ityby the opera t ing managemen t , and second, i t s effect on the cost ofproduct.

Therefore, in an ar ticle of this kind it would seem wel l to coverthe subject in a manner applicable to a factory, the product of whichis so va r ied tha t a s in gle un i t for the m easur emen t of t ha t outputproba bl y woul d not be adop ted. I t wou ld seem des i r able a lso todefin e an y terms which we may find necessar y to use, such as thefol lowing:

1. Di rect ma ter i a l i s th e ma t er ia l wh i ch becomes a par t of agiven ar t i cle in i t s del ivera ble form.

2. Direct labor i s tha t labor wh ich is di r ect ly used to turn outth e p r oduct for wh i ch a depa r t men t i s cr ea ted. (Hence, th e r e-pai r s made by the Main tenance Service Depar tmen t ar e dir ectlabor of tha t depar tmen t . )

3. Convert ing is changing r a w materia l from the form inwhich i t was purchased. In th e rubber i ndus t r y th is wou ld coverthe opera t ion s th rough com poundi ng; in foundr y pract ice t h roughthe cupola, etc.

4. For mi n g i s ma k in g in t o sh apes a s by pr essi n g , s ta m pin g ,molding, etc.

5. Processing is any r efin ing of shape by hand or mach ine.6. Fi t t ing and assembl ing is the fi tt ing of component par ts for

assembly and the actual assembl ing of such par ts in to a completedarticle.

' T h i s article is based upon a paper read before a meeting of the New York

Chapter.3

7. Power service should include generat ion , tr ansmission , heatand l igh t .

8. Maintenance service covers the general mechanical wor knecessary to keep t he plan t runn ing, a nd includes a l l ma in tenanceand r epair s of plan t and equipmen t .

9. Con trol service includes al l cler ica l and genera l office work,such as genera l supervision, plann ing, dispatching, employment , ac-coun ting, etc.

10. Pr oduct i ve depar tm en ts ar e t h ose depar tmen ts in wh ichth e la bor i s per form ed di r ect ly on th e pr oduct t o pu t i t i n t o sa le-able condi tion (compr ising 3, 4, 5 and 6 above).

11. Con tr i butory depar t men ts a r e those depa r tmen ts whichper for m service for other depa r tmen ts (comprising 7, 8 and 9a bove) .

12. Burdens are al l expenses other than di rect labor and di r ectmater ia l (including i tems 7, 8 and 9 above and as noted below).

ELEMENTS OF MANUFACTURINGWe ca n now s t a t e t ha t m an ufa ctu r i n g con si s ts of a combi na -

tion of two or more of the fol lowing:Direct Mater ia lProduct ive Effor ts

Conver tingFor mi ngProcessingFi t t ing and Assembl ing

Con t r ibutory E ffor tsPower ServiceMaintenance ServiceControl Service

BURDEN CLASSIFICATIONIn arr iving at the tota l cost of product we r ecogn ize, of cour se,

that the cost of con tr ibutory efforts is a burden to be combined withthe cost of produci ve effor ts by some method of dist r ibut ion . Wealso know t h a t each depa r tmen t , wheth er housing product iveefforts or con tr ibutory efforts, has overhead or burden expenses ofits own . Th ese depa r t men ta l bur den i t em s m a y be divided in toth r ee gr oups :

Pr oduct BurdenEquipm en t BurdenGeneral Burden

Such expenses migh t be fur t her subdi vided as fol lows:Product Burden

InspectingRepair ing

4

Stor i ngTeaching beginners, etc.

Equi pmen t Bur denCur ren t Repai r s on :

BuildingsEquipmen tMachineryToolsFur n i t ur e

Fixed ChargesDeprecia tionTaxesInsurance

Gener al BurdenSupervisionClericalClean ing and Oi l ingReceiving and Stor ing PurchasesSh ipping

ACCUMULATING FOR A DEPARTMENT

Accept ing as basic the above definitions, etc., let us nextexamine the r esult of some par t icular cost compila tion and find outhow that r esul t was obta ined. Suppose we take up a depar t men ta lcost sheet, for in stance (see Form 1 on page 6) . Th is for m sh owsthe cost of opera t ing Depa r tmen t No. 1 , kn own a s th e Conver t ingDepar tmen t . On t h i s for m we n ot e t h a t i n a gi ven per iod $864was pai d for di r ect labor . As th i s i s a pr oduct i ve depar t men t , aspreviousl y defi ned , we know th at th is labor was spen t on pr oductmade for sale. Reference to the service tickets (t ime tickets)cover in g th is labor wi l l r eveal the amoun t of di r ect or product ivelabor spen t on each class of p roduct .

We a lso note on the form that t he tota l burden or overhead ofth is depar tmen t for the per iod under r eview was $1,112. A s tudyof Form 1 r eveal s t he fa c t t ha t $817 occur red d i r ect l y i n t he de-par tm en t or a t least was m ore or l ess subject t o th e con trol of thedepar t men t head. Of t h i s a m oun t $97 were over hea d due t o t h epr oduct t ur ned out dur i ng t he per i od . $105 wer e due t o r epa i r sof equipment of the department . $415 were fixed charges, and $200general expenses, as previously defined.

SOURCES OF BURDEN CHARGES

Suppose we n ow put ou r se lves i n t he pla ce of the forem an ofth is depar tmen t and call on the Accoun ting Depar tmen t for the de-

C n

COST OF OPERATING DEPT. I PERIOD ENDING 1 9 -FORM 1

DEPARTMENTI. CONVERTING

o

� «Mo s th < F

« a

r

„ns

TOTALCOST TOOPERATE

D I R E C TL A 8 0 R

T O T A LBURDEN

A N A L . Y 5 1 S OF B U R D E ND E P A R T M E N T A L E X P E N S E S AS TO PROPORTION

CONTRIBUTORYDEPT5.

DRODUC:T E U I P M E N TGENERAL

CURRENT F IXEDAMOUNT AMT RATE AMT WE AMT_ RATE AMT RATE AMT RATE AMT MATE AMOUNT

30 MEN 1440 HRS. TONS 664 864I NS DE CTI NG 7 2 7 2 7 Z

R E P A I R I NG 2 5 2 5 2 5

BUILDINGS 15 i s 15MACHINES 9 0 1 9 0 9 0DE P RE C I AT I ON 2 9 0 2 9 0 2 9 0TAX ES 75 75 75INSURANCE 5 0 5 0 SOSNPERVISION 1 0 0 1 10 0 1 0 0CLERICAL 3 5 35 3 5C L E A NI NG 2 5 25 2 5

M I S C E L L A NE O US 4 0 4 0 4 0

POWER_

1 6 0 160 160M A I N T E N A NC E 1 5 15 15

CONTROL 1 2 0 120 1 120

T O T A L S 1976 864 1 112 97 105 415 200 295RATE PER TON

MAN IJP.

$ DIRECT LABOR

ESTIMATED COST OF

AT CQ IRED 8 0 0 0

STANDARD FOR BUDGET 9 9 7 6

ta i l comprising these charges. The Accoun t ing Depar tmen t wouldrepor t such in form at ion as fol lows:

CHARGES FROM SERVICE (TIME) TICKETS

Labor in spect ing productClass B $1.00

" C 30.00" I 9.00

is N 2.00" S 30.00 $72.00

Repair ing Cl ass S 20.00 $92.00

Here the Accoun t ing Depar tmen t has been able to show the fore-man that the cha rges wer e ma de d i r ec t ly from payrol l r ecords ap-proved by h is author i ty; tha t i s, ei ther by h imself, h is assistan t orhis clerk.

Th is leaves charges of $5 which were not labor . Th is wil l befound under Ma ter ia l Used Ti ckets.

SALARY LIST (GENERAL)

Foreman and Assistan t $100.00Dispatch Clerk 35.00Jan i t or 20.00 $155.00

The forema n , of cour se, i s fam il ia r wi t h the sa la ry l i st of h isown depar tmen t and accepts th is analysis.

MATERIAL USED TICKETS

Repair ing Product S $5.00i t Buildings 5.00

(Propor t iona te r epai r of r oof)Repair ing Mach inery 27.00Cleaning " 5.00

The Mater ia l Used Ti cket s ar e p roduced to show the foremanthe actual materia ls i ssued on h is own requisit ion for r epai r ing theproduct and for clean i ng and oi l ing t he depa r tmen t and i t s equip-men t . The Accoun t in g Depar t men t sh ows th e for em a n t h a t t h eroof of t he bu i l d i ng wh ich h ouses his depar tmen t had t o be re-pa i r ed , a n d t h a t t h e cos t of such repa i r s i s divided bet ween t hedepar tmen ts in the bui lding in propor t ion to the space occupied byeach. Th e m at er i a l ch ar ge for r epa i r in g m ach i n er y was for m a -ter ia l i ssued on a r equisi t ion of the ma ch ine shop foreman for useon r epair order s pla ced by the foreman of Depar tmen t No. 1.

7

Ot h er ch ar ges fu rn i sh ed by t h e Accoun t i n g Department areshown to be for the fol lowi ng:

LABOR FROM MAI N TEN AN C E AN D SERVICE DEPARTMENT AS PERSERVICE TICKETS (TI M E TI C K ETS)

Carpen ter Shop $10.00(Propor t iona t e r epa i r of r oof)

Machine Shop 63.00

LIABILITY AN D COMPENSATION IN SU RANC E $20.00As th e p r emi um for liability insurance i s se t a s a r a t e p er

dol lar of payroll , + h a f n r a m a n f i n s a + h a t fh i a r h n r c r p !990 i s i n ti ro_

por tion to the wages paid in h is departmen t .DIRECT CHARGE FROM THE VOUCHER REGISTER

Outside par t ies making an emergency cal l— $20.00A breakdown caused an emergency call on a physician not

covered by the in surance policies. Th is charge, not being the pur -cha se of m at er ia l , wh ich cou ld be h and led th r ough th e st oreroomrecor ds, n or th e employment of l abor , wh ich migh t a ppear on t hepayrol l, demanded specia l considerat ion. The bi l l wh en receivedwas not covered by a r eceivin g r epor t . Therefore, the charge waspa ssed for pa ym en t on t he di r ect a pproval of th e wor ks m an ager .In the bi l l r egister i t was of cour se en tered as a charge to th e fac-tory l edger . In th e fa ct ory ledger i t wa s car r ied to a suspenseaccoun t used for all special items called "Fa ct or y Adjus t m en t s . "I t wa s c l ea r ed by jou r n a l en t r y fr om t h i s a ccoun t t o t h e gen er a loverh ea d of t he depar tm en t in cur r in g th e expense. Th e forema nhas now obta ined a detai led explanation of h is departmen tal chargesas fol lows:P R O D U C T B U R D E N

Labor $92.00Materia l 5.00 $97.00

E Q U I P M E N T BURD EN — CURREN TLabor — Carpenter Shop $10.00

Machine 63.00 73.00

Materia l— Carpenter Shop 5.00Machine 11 27.00 32.00 105.00

G E N E R A L B U R D E NSalaries $155.00Materia l 5.00Liabili ty Insurance 20.00Specia l Charge 20.00 200.00

Now, suppose th e foreman , desi r in g t o earn a bon us by a l owcost r ecord, says to th e ch ief accoun ta n t , "How does i t com e t h a tmy fixed char ges ar e so h igh ?" The ch i ef accoun t an t shows h im

8

the record of investmen t for h is depar tmen t . It is expla ined to theforeman that for every piece of equipmen t in his depar tment a cardrecord is kept sh owin g its original installed value; it s expectedli fe; a ra te of deprecia tion based on that expectancy; the accumula-t i on of deprecia t i on to dat e based on t h at r a t e ; i t s p resen t soun dvalue, and a r ecord of repairs made to it since it s in sta llat ion. Theforeman a lso finds that the por t ion of the bui lding he occupies hasbeen careful ly va lued and r a tes of depreci a t ion es tabl ished, basedon the expected l ife of the various por t ions.

For taxes he discovers that the total va lue of the plan t i s takenand divided in to the sum of the taxes paid to obta in a r a te per dol-lar of investmen t . If the tax bi l l i s d ivided between r ea l and per -sonal proper ty, the plan t values are divided in like manner , and thera te for each class of taxes is obtained. These ra tes ar e thenapp l i ed to th e val ues wh i ch ha ve a l r eady been shown to th e for e-man as invested in his department , and thus the proport ion of taxeschargeable to h is depar tmen t i s obtained. Fir e, and use and occu-pancy insurance costs are divided between the depar tmen ts in l ikemanner .

Income taxes, of cour se, ar e not t r ea ted as overhead, being r e-garded as a dist r ibut ion of profit s to a prefer r ed par tner .

Up th rough this poi n t t he cost of con tr ibut or y depar tmen tsis handled in the same manner as the cost of the product ive depart -men t wh i ch we ha ve just been r eviewing. For in stance , the oper -a t in g cost sheet for th e ma ch in e shop of t he Main tena nce ServiceDepar tmen t wou ld show a s di r ect labor a l l labor per for med doingmaintenance and r epair work chargeable to other depar tments thanitself. Repai r to i t s own equ i pm en t wi l l go di r ect t o E qu i pmen tBurden of the Main t enance Depar tmen t .

INTERDEPARTMENTAL CHARGESIn t h i s ma n n er we a r e a ble t o g i ve t he wor ks m a n agem en t a

set of r epor ts sh owing t he cost of opera t in g each depar tm en t a ndof the factory as a whole (see Form 2 on page 10) . However , as weare in business to secure profi t s from the sa le of products, we mustconvert these costs of opera t ing in to costs of product for sale.Si n ce t h e ou tpu t of ou r con t r i bu tor y depar t m en t s is sold on ly toour selves for the purpose of opera t ing the product ive depar tmen ts,we must find some basis for charging the costs of these departmen tsto the product ive depar tmen ts.

Of cour se th er e ar e som e in terdepa r t men ta l ch ar ges bet weenthe con tr ibutory depar t men ts which must be disposed of beforethese departmen ts are final ly closed out.

Since th e cost of con tr i butory depar tmen ts i s even tual l y to becha rged to pr oduct ive depar tmen t s, absolute accuracy of char gesbetween con tr ibutory departmen ts i s not essen t ia l . Hence we wi l laccept service from the Main tenance Depar tmen t to the other con-t r ibutory depar tmen ts a t labor plus ma ter ia l on ly. We wil l accept

9

0

PLANT OPERATING REPORT FOR PERIOD ENDING Ig FORM 2

o� < , TOTAL BURDEN A N A L Y 5 1 5 O F B U R D E N

DEPARTMENTS a� e o n OJERATIN� ' DIRECTLABOR

INDIRECT

LAB02 &DE P A R T M E N T A L E X P E N 5 E 5 AS TO CONTRIBUTORY

P R O D UC TE Q U I P M E N T

GENERALn z F Q

a t i p dv a

0C O S T

MATERIALEXDENSES

CURRENT FIX E D DISTRIBUTEDAMOUNT AMT � � � AMT FATE AHT RATE A M T RATE A M T Ra t AMT R A - AMOUNT

I CONVERTING g ;I I I2 97 105 415 200 295

2 FORMING

T 9 7 �864

2 2 0 0 4 5 0 12 0 6 0 0 4 0 0 6 3 0

3 PROCESS I NG 1200 200 40 280 zoo 480>_

i -U

FITTING AND4 ASSEMBLING z 1000 300 700 100 30 170 210 190

o

0TOTAL OPERATING E 8576 3364 5 Z I z 847 295 1465 l o l o 11 9-5

a DIRECT MATERIAL 4260

T O T A L CO S T O F1 2 8 3 6PRODUCT M A D E

0 5 POWER 545 235 310 110 20 5o 130

5 6MAINTENANCE 400 300 100 15 30 557 CONTROLoz

a650 200 450 40 20 390

TOTAL SERVICEDISfRI6iI7CD OYlA VRDDUETIYt 1595 735 86o 110 75 loo 575

REMARKS i

I

I

ser vi ce fr om t h e Power Depa r t m en t a n d t h e Con t r ol Service De-partmen t at a fixed figure for each accoun ting period to each of theoth er con tr i bu tory depar tmen ts. In ot her wor ds , power will befurn ished to the Main ten ance and Con trol Depar tm en ts on a basissimi lar to a r enta l , and the con trol service wil l be furn ished to thePower a nd the Main ten ance Depar tmen ts on a fixed r a te ba sis perweek or m on t h , accor din g t o the lengt h of the accoun t ing per iod.Such charges form par t of the amoun ts shown for the con tr ibutorydepar tmen ts in the General column on Form. 2.

Having credi ted each of the con tr ibutory depar tments for thesedefin ite charges against each other , we next proceed to close out tothe product ive departmen ts the balance left in the accoun ts of eachof the con tr ibutory depar tmen ts.

Now we h a ve r ea ch ed t h a t ph a se of t h e subject wh i ch fa l l sst r ict ly un der th e h ea din g "Dis t r ibu t in g t he Overh ead ," of wh ichi t i s n ot the purpose of th is ar t i cle to t r ea t .

11

Vol. IINo. 9 —Cost Accou nt ing for Pu bl i c Utili t ies, E. D . BistlineN o. 1 5 —W ha t I s W r o n g wi th Cost Accou nt ing? G. Ch a rte r H a r ru o sN o. 1 6 — A M eth od of Dist r ibu t ing Fa ct or y Pa yrol l , Matthew PoroskyN o. 17 —Coal Product ion Cost s , R. W. GardinerNo. 18— Uniform Cost Acc ou nt i ng Me t ho d s in the Pr i n t i ng Ind u st ry , W . B.

LawrenceNo. 19—A Cost Sy s t e m fo r a n Elect r i c Cable Pla nt , Fred F. Benke

VOL II INo . 4 — So me C ost P ro bl em s i n th e H a wa i ia n Su ga r I nd u s t r y , F. A. HaenischNo. 6 —Some P h a s e s of Cost Ac co u n t i ng in the Chem ica l In du st ry , C. B. E .

Ros inNo. 7 —Cost Account ing i n t h e Soa p Ind u st ry , Wil lia m C. KockNo. 1 0 — Lis t o f R efe ren ces on In ter e st a s a n E le men t o f C ostNo. 19— Normal Bu rd e n Ra t es , Charles Va n Zandt

VOL IVN o. 3 —First N ew En g l a n d Regiona l Cost Conference.No. 5 — St ea msh ip O pera t ing a nd T ermin a l Co st s , Joseph J . Mulhern and Urbain

RobertN o. 6 — Co st P ra ct i c es a nd P ro bl em s in t he P ro du ct io n of Cok e, C. C. SheppardNo. 7— Production Cost s in the Ma nu fa ctu re of P h o n o g r a p h Reco rds, C. J .

BortonN o. 8 — C os t Pr o b le m s i n th e W ro u g ht I ro n In d u st r y , Carl G. Jensen, Comp.N o. 10 —Coat Accou nt ing fo r C r a n e s and H oist s , P. E . Sto tenburN o. 11 —Cost Ac c ou n t i n g i n t h e T o ol Steel Indu st ry , John 1 . KeefeNo. 15— Principles a nd Pra c t i ce of Const ru ct ion Cost - Keeping. Pa r t I I—

Ana ly zing Cost s , Wil lia m M. Affe lderNo. 1 6 — Sta nda rd Cost s —H ow to Esta bl i s h a nd Apply T hem. William F. WorrallN o. 17 —A Me t ho d of Collecting Di rect L a b o r Cost s and Stat i st i cs , George

H . FrieselNo. I8 —Cost Acco u nt ing for Self La y in g T ra ck T ra ct or s , Percy EhrenfeldtNo. 1 9 — Pa per s a nd D iscu ssions —T hi rd N ew Engla nd Regiona l Cost ConferenceNo. 20 —Radio Edu ca t iona l Ca mpa ignNo. 21 —Cost Acco u nt ing in Rela t ion to Bu siness Cycles, John R. Wi ld m a nNo. 22— Cotton Mil l Cost s , W. A . Mu s g r a v eNo. 23—A. Pu n c h e d Ca rd S y s t e m of Inv ent ory Cont rol , W . V . Davidson

Vol. VN o. 2—A Pr c bl e m i n J oint Cost s , Wil lia m Morse ColeNo. 3 —A Me t ho d of Costing Pa r t i a l ly Completed O r d er s , C. B. Wi l l ia m sNo. 4— Choosing the Basic Cost P la n , Eric A. CammanNo. 6—Cost Accou nt ing in the Produ ct ion of Mot ion Pictu res, William R.

Donaldson

N o. 7 —An In t ro du c t i on to Pre det er min ed Cost s, George ReaNo. 8—A Pra ct i ca l Met ho d of Cost Acco u nt in g in a S hipbu i ld i ng o r Shi p Re pa i r

P la nt , L. V . Hedrick .No . 9—Get ting the Mo st O u t of Bu siness Records, Matthew L. Carey.No . 10—The Ex p e n s e of P o w e r a nd Building Service, J a m e s P. Kendall.N o. 11.— Indirect La bo r , Harry J. OstlundN o. 12.— Accumulating the O verh ea d, Albert V . Bristol.

Co pies of th e ab o ve pu b lica t io n s wh ich are not o u t of p r in t may be ob ta in ed fr o m th e officeof th e Se cr e t a r y of the Ass oc iat io st 130 W . 42n d S t r ee t . Ne w Yo rk C i ty , a t t h e p r ice of 75 eeo t aPer COPY.