IDENTIFICATION OF COSTS 1. Classification of accounts.—From the foregoing it is obvious that cost finding is concerned with two kinds of accounts. Those that have to do with the actual production are constantly changing, a new ac count being opened with every new undertaking and closed with its completion. On the other hand, the accounts that have to do with repairs on buildings, maintenance and repairs of equipment and similar matters are permanent in their character, continuing as open accounts so long as the enterprise lasts. The same is true of labor expense and material expense which cannot be allocated to any particular piece of work. They are expenses which flow constantly, without change in their characteristics.
The first step, therefore, in establishing a cost sys tem is to make a careful classification of these ac counts. This classification will, necessarily, conform in its general outlines to the manner in which it is de sired to have all transactions appear in summarized form in the general accounts, and also to the character of the statistical information which it is desired to col lect. The classification 1 will also necessarily vary in character and detail, according to the size of the en terprise and the character and variety of its product. The classification for a mercantile establishment will not be quite the same as that for a factory manu facturing machinery. The following is a typical classification of the general ledger accounts as found in enterprises of the latter class, with a few of the char acteristic subheadings to show the kinds of charges belonging under each heading. A more comprehen sive list is used by large manufacturing enterprises; one large electrical manufacturing establishment has over two hundred and fifty of these accounts. The justification of this large number lies in the fact that what may be a small item in a small plant may amount to many thousands of dollars in a large one, and the possibilities of saving more than offset the cost of seg regating the accounts. This is especially true of the expense accounts. The monthly statement, Figure 3, is, of course, a summarized statement of these ac counts, arranged so as to show the totals of the several classes with only such detail as appears to be indis pensable.
2. Formation of subsidiary ledgers.—It is obvious that the ledger accounts or controlling accounts, listed above, are necessarily fed from many sources. Thus if a piece of land or a new machine is purchased the transaction does not pass thru the manufacturing or ganization but is conducted thru the manager or superintendent directly with the real estate agent or the machine builder. The purchase price is added to the proper account under permanent assets and the cash account, if it be a cash transaction, is lessened by the corresponding amount. If, however, the ma chine is built in the shop, as is frequently the case, a quite different procedure is adopted and care must be exercised that the correct cost of manufacture is ob tained by taking account of all direct and indirect ma terial and labor expended in its construction. , If proper sales prices are to be fixed for goods manu factured for the market, the cost of every article manufactured must be ascertained, and if the general accounts are to be balanced frequently the value of all material—finished, in process and in the raw state— must also be evaluated frequently.
If the enterprise is small all of these requirements can be met by accounts in a single general ledger, the detail items under each account being consoli dated to permit such treatment. But as any estab lishment grows it becomes increasingly necessary to go into greater and greater detail, and subsidiary ledgers are opened to handle this detail the sum marized statements of which may be carried to the general ledger. Thus it is often desirable, as ex plained in the Text on "Accounting Principles," to open one ledger for accounts receivable and another for accounts payable. The cash transactions are often kept in a separate cash book and a separate ledger may be necessary to keep proper account of the ma chinery and equipment. The number and character of these auxiliary ledgers will depend entirely on the size of the business and the character of the output.