9. Valuation of issued value of material stored in the bins of the storeroom is neces sarily somewhat greater than the market value of similar material. Freight, cartage, the handling of the material in storing it, rent, or interest on the building investment, insurance, wages of storekeepers, waste, shrinkage in use, as by saw-cuts and remnants, defective pieces, repairs and other storeroom expenses, are all necessary expenditures which must be paid in order to obtain the advantages of having material ready for immediate use. This expense should never be overlooked in evaluating the material issued from the stores, particularly if material should be shipped directly to a customer from the storeroom, as is done in mercantile establishments. Unless the billing price of such goods is an advance on the market price paid for them, it is evident that a loss will be incurred. In fact, it is sometimes more profitable for a factory to order standard material to be sent directly from dealer to customer than it would be to fill the order from the storeroom bins.
Furthermore, material is crystallized capital which is earning no interest. It is perfectly proper, there fore, to charge against it the interest that it should earn; and this, again, adds to its value. Materials also may depreciate in value while stored, and while this loss in value is a proper charge against produc tion it is usually more convenient to handle it in a - manner separate from those methods now to be dis cussed.
In the simpler and merely approximate methods of cost finding, all storeroom expenses are carried to the factory-expense account and charged off as part of this expense. While this insures that the total of such expense is cared for, it does not distribute it logi cally, and more modern methods of cost finding dis tribute storeroom expense as a percentage on the value of the material issued. This, as will be seen later, is in accord with modern tendencies, which aim to allocate all expenses, as far as possible, to the par ticular activity to which they peculiarly belong. The value of issued material should, therefore, be deter mined by adding freight and cartage to the invoice price of the goods and then adding a percentage to cover storeroom expenses.
Now, the invoice price of the same goods changes constantly with the changing market price. The ma terial in a given bin may have cost more, or less, than a new lot which has just been added. To equalize this difference in prices, the total value of the entire lot may be divided by the total combined number of pieces or pounds and a new average rate determined which will equalize the market fluctuations.
10. Value of material in process of fabrication.— It will be noted that the foregoing storeroom methods do not take cognizance of materials that are in process of fabrication. Modern accounting methods, how ever, often require regular and frequent statements of the financial conditions of the enterprise. If the
latter is of the continuous type, where the value of the material in process, at any time, is not great, the methods described above may be adequate for all pur poses. In many cases, however, the value of the ma terial in process is very great and no correct state ment of the business can be rendered without taking it into account.
It is obvious that it would be impossible to keep account of the cost of the material in process by simply adding to its value the value of the material drawn from stores, and subtracting the value of the material delivered to the stores or the shipping room. For this reason, even in factories where some lines of product are in continuous production, it is customary to pass the product thru the factory in lots, a produc tion order being issued for each lot. If a cost ledger is kept, an account would be opened for each lot under its own production number, and all material which went into the lot would naturally find its way to this account and could be evaluated at any time. The total value of all material appearing in the cost ledger is the value of all material in process.
11. Value of finished parts.—So far as the produc tion department is concerned, finished parts manu factured for stores do not differ from other products, and they should bear their full share of all indirect expense. This should be kept in mind in evaluating such parts, since, factory expense is an integral part of shop cost. Thus, one manufacturer might buy from another manufacturer some finished parts, such as gears, for instance, storing them in his regular storeroom, and issuing them to the factory at the cost price plus the cost of handling them in the storeroom. Or he might make these gears himself, keeping ac count of all labor, material and indirect expense in volved in their production, and then deposit them in his finished-parts storeroom, assigning to them the value thus determined.
In issuing such manufactured finished parts to cus tomers for repairs, they would, of course, be charged with their proper share of general expense and with an allowance for profit, just as in the case of any other finished product. In issuing them to the production department to be used in assembling complete ma chines they would be treated like any other material or finished parts that have been bought elsewhere. Care must be exercised, however, to see that expense charges are not duplicated. Thus, if the material value is used as the basis in distributing the expense it would not be logical to charge the expense on this basis when putting the finished parts into the store room, and then to duplicate this procedure when the parts are assembled into finished machines. The best method of distributing the expense on finished parts will be clearer after a discussion of the methods by which such distribution is accomplished. This mat ter is treated fully in Chapter XIII.