INDUSTRIAL COST ACCOUNTING Industrial cost accounting is a definite division of account ancy which embodies the analysis, control, and interpretation of such financial outlays as are necessary in the manufacturing of an article or service, and for measuring the performance of each and every productive process involved in making such article or service. By use of cost accounting, executives segregate profit able from unprofitable units; locate and measure wasteful meth ods; and measure through the use of variances, deviations from standard performance for each and every activity carried on within the plant.
All costs classify into three elements: (I) Direct Labour Cost; (2) Direct Material Cost ; (3) Overhead Cost. The first two elements are directly identified with the specific units made and together constitute "the prime cost" of the unit. Overhead cost, in contrast, cannot be directly attributed to specific units and therefore must be spread to the units by some indirect pro cedure. Many different methods are found throughout industry for doing this. Earlier methods used a relationship between over head and the direct labour dollars, or the direct labour hours, or the prime cost. Further advances distributed overhead to the ma chine hour, or bench hour time that was involved in making spe cific units. Present methods in more advanced industries distribute their overhead through standard costs. By this procedure over heads are budgeted to the different operating departments. These departments also are budgeted for so many standard units of goods, usually expressed in units per hour, and the budget cover ing overhead is spread according to these units.
Actual costs are the traditional type found in American indus try. Their operation gives around the loth, or 15th of the month. a cost picture of the previous month's operations broken down as to the actual costs of departments and of units.
Standard costs differ widely from actual costs. They consti tute an entirely different philosophy of industrial management.
They are a fundamental part of the "exception principle" in in dustry. Under this principle, management concerns itself only with off-standard conditions—the exceptional things. The bulk of the work goes through the plant at a standard cost known and understood before the operations begin. The exceptions show as variances from the standards and these must be analyzed. Under a standard cost system the costs of the unit remain constant for a year and are based upon the following principles: (a) The plant as running at normal volume.
(b) The weighted average rate of pay set forth for each operation.
(c) A standard time established for the work to be per formed.
(d) Material costs reflecting definite yields.
(e) Material price conditions set for a long time period.
Costs under such a plan reflect normal conditions. The thou sand and one actual cost items that jump up and down, go hither and yon, are but detours from the charted course. Such detours are reflected as operating variances. The study and analysis of these variances form the basis for setting operating policies.
Standard cost procedure also embodies the flexible budget, whereby all supervisors are controlled by a budget shaped to any given volume of production.
Management working under standard costs has a planned pro gram for th2 month and the year ahead. All operations are meas ured by what is done against what should have been done. Vari ances from normal are corrected quickly so that malconditions do not become cancerous.
Application of Standard Costs and Budgets to Distribu tion.—A recent development has been the extension of standard costs and flexible budgets into the field of distribution covering delivery, advertising, selling. and administrative costs. Budgets are established for each distribution at a standard volume of sales and at a standard price for the products. Deviations from these standards are noted monthly and the whole field of distribution works on the "exception principle" just as does manufacturing.
Cost accounting is little more than 4o years old. But it has made great strides forward. During this period it has become the most effective tool of management. It now controls expenses in relation to the volume of goods. It measures actual perform ance against standards and analyzes the causes of the variances. Foremen, supervisors, general managers, district sales heads, and sales managers, each have a specific cost program established for them that measures their accomplishment. Reports that emanate from the standard cost accounting system reflect how well they have performed the tasks set for them.