CHAPTER XXI THE COST ACCOUNTING SYSTEM Cost-Keeping Defined What is cost-keeping or cost-finding? How does it differ from bookkeeping? Cost-keeping is the service rendered a business by accumulating expenditures made for production, by determining quantities produced, and by developing their unit costs. This accumulation of data and the development of costs have for their primary object the study of actual production costs, and their reduction whenever possible. Bookkeeping is the service which records the capital investment, the subsequent incoming and outgo of cash or property, and finally ascertains the net worth of a business at the end of a certain period of time. This service, therefore, has for its primary object the accounting for capital originally invested in a business and the increases thereto, or deductions therefrom, resulting from operations. A further object is to indicate the classes of assets representing the capital remaining in the business. Bookkeeping develops the sources from which increases in capital arise and those responsible for decreases. Cost-keeping analyzes the sources to determine where production losses can be reduced and profits increased. Conditions Underlying Construction Cost-Keeping A system of cost-finding for the construction industry differs basically from one adopted in manufacturing and trading, and in its relation to performance of work and to the accounting records. In the majority of manufacturing and other enterprises, the cost of the product is first determined and the selling price then established. Orders for the product may sometimes be taken before manufacturing has begun, but the selling price on future orders is generally established after the cost of manufacture has been ascertained. The selling price of construction work is generally agreed upon before the actual cost of the work contracted for can be determined. It is developed through an examination of the plans and specifications to ascertain the quantities and character of work to be done. This work is then partly valued upon cost experience gained on prior contracts. The contractor's fee is added to this valuation and the sum is the contract or selling price. An owner occasionally agrees to pay the contractor the actual cost of construction, plus a fee, without setting a limit upon the total amount he is called upon to pay. The volume of business in manufacturing and mercantile lines generally consists chiefly of numerous sales of the same commodity. No two orders are alike in construction work. Even if the type of work is the same, details of construction vary. The nature of the soil affects the character and cost of foundation work when the job is an office building; interior decoration may increase or decrease the cost of finished woodwork, marble-work, etc. The cost of its exterior depends upon whether it is built of brick, cut stone, or marble. Fluctuations in transportation costs and modifications in labor rates in different sections of the country, and even in the same state, directly affect the cost of performing work in one city, as compared with doing it in another, even though the construction is identical. A construction cost system must be sufficiently complete to develop costs for different features of work and must consider the conditions under which it is done and the locality in which it is performed. One purpose of the system is to develop data which can be safely used as a guide in determining the selling price of future work. Another object is to control the cost of production while work is in progress. A purchasing agent may be very efficient and obtain supplies and material at very low prices, but if proper control of labor costs is lacking, the superintendent or foreman in charge of mechanics and laborers can cause greater losses in a short period of time than the purchasing agent and others can save during the entire performance of the contract. There is a very marked difference in the time required to complete a unit of production or unit of sale in the construction industry, compared with that necessary in manufacturing or trading. The unit of production in manufacturing may be anything from a screw or nut to a bolt of cloth, pieces of furniture, etc. The time required for the production of single units ranges from great quantities manufactured in a day to a single unit in a few days. In a mercantile business, the unit of sale is complete each time a sale is made and frequently hundreds of individual sales are made each day. Payment for sales does not generally decide the amount of the sale. Nonpayment of a balance due a manufacturer or merchant involves the balance of an account of a number of sales but not the selling price of merchandise and is rather a matter of bad debts. Actual construction requires months and sometimes years before one individual contract is physically entirely completed. The selling price is the amount the owner ultimately pays the contractor for work performed. The sale is not complete until the physical work has been entirely finished and payment made therefor. For these reasons a distinction exists in the relation of the cost to the accounting system in the average business when compared with the same relation in the construction industry. The chief requirements of the former are that the total cost of production, as given in the cost ledgers, shall equal that shown by the accounting records, and that the quantities of produc tion given by the cost system shall be in agreement with the inventory records of the accounting department. The relation between the two systems is more intimate in construction work. The total cost shown by one system must be the same as that given by the other, but there is an absence of the factors necessary to prepare a trading statement in the form usually used in manufacturing and mercantile enterprises. Profit on construction is gauged by that originally anticipated on signing of the contract, modified by gains or losses resulting from actual performance. A contractor may have undertaken a $600,000 project, on which, at the time of signing the contract, he contemplated making a profit of $48,000. It does not follow that because $400,000 has been expended, and the contract is two-thirds finished, the contractor has earned two-thirds of his estimated profit of $48,000, or $32,000. The work completed at an expenditure of $400,000 may have been estimated to cost $380,000 or $420,000. If its estimated cost was $380,000, the contractor's profit would be the $32,000 mentioned above, less the $20,000 loss through performance. The particular classification or line of work which was performed at a loss and caused the increase to $400,000 of work estimated to cost $380,000 might be a trade which was uncompleted and still in progress at the time the profit and loss figures were determined. Consideration would have to be given to the possibility of a further reduction in the estimated profit, through a loss to be sustained in carrying out and completing that particular trade. Cost Accounting Records The following records and reports are necessary to record properly actual cost of performance and to develop information having a productive value: The working estimate is the tabulated analysis of the estimated cost of the work covered by the contract. The "standard of cost accounts" covers the work embraced by the entire contract, subdivided according to features of work, each of which is given a symbol. The symbols are used to distribute labor on payrolls and material on invoices. The record of expenditures (Purchase Register, Form 18) was discussed for convenience in Chapter X, this record being prepared simultaneously with the one for the accounting department. Details as to the treatment of payrolls, the delivery or return of material, actual expenditures for subcontract work, etc., were discussed there in full. The cost ledger contains the analyzed cost incurred in connection with each feature of work. Production reports are prepared in the field by the engineer and show the number of units of each feature of work performed during each period. These reports are discussed in Chapters XXII and XXIII. Cost reports are summaries of the analyzed cost. Some show the cost of production for different units of work. Others summarize and compare the actual cost of work performed with the cost originally estimated. These are also taken up in detail in Chapter XXIII. Working Estimate The working estimate embraces all work included in the contract with the owner, and its preparation is based on the bid estimate quantities and their values used when submit |