STANDARD COST FINDING PRACTICE 2?OR STEEL. FOUNDRIES PUBLISHED BY STEEL FOUNDERS’ SOCIETY OF AMERICA : Zh " = Po Wa & LE Hl shad rd ». LECT al LB WB * Se Me ot on, si om + WN TON AAA STANDARD COST FINDING PRACTICE TOR S1I'EEL FOUNDRIES ae a A oo a oR - 3 3 "a BL LB eaad® i A sy 3 yo Na ’ Lom PUBLISHED BY STEEL FOUNDERS SOCIETY OF AMERICA 1927 Bow ryt : Bimota Fol FIRTAGNY ISLS . AYE her AL 3 : ov ie hnhas Brnli Sele Zig? 0 ah AE ph Sh * gy. 3 0 , Bo yA og CONTENTS PAGE NO, Jses of an Effective Cost System... Jniform Cost Finding Methods. . . Advantages of a Uniform Cost System. Cost Divisions of the Foundry... Standard Classification of Accounts. Melted Metal ....... Molding Department .. Direct Labor ... Indirect Expense “ore Department . ... Direct Labor ... Indirect Expense “leaning Department Direct Labor .... Indirect Expense ............. \nnealing or [leat Treating....... Seneral Overhead ..... Special Charges ......... >roduct of Metals Charged Into Furnaces. .... Accounting for Materials, Supplies. and Other Charges . Accounting for Labor . Depreciation ......... Capital and Revenue Expenditures Dperating Reserves ........ Surplus Reserves .. Cost of Sales........ Average or Normal Costs. ............. Monthly Summary of Cost of Production... BOM wo ntarrms rvs Cost of Steel and Overhead Rates. . Yield ......... Cost of Steel. ... Overhead Rates ....... Jost of Individual Castings. Form ........ Cee Actual Costs and Estimated Costs ofit LL. + 0 ‘0 rr [1 3 2 6 16 16 17 2& 19 fro 23 25 24 INTRODUCTION The subject of cost accounting is frequently considered by some to be beyond their power to compre- hend, although it involves nothing mysterious and it can be readily understood by those not familiar with accounting theory and procedure. Cost accounting is really nothing more than the adaptation of common sense in a systematized manner for the purpose of providing facts and figures for use as guides in efficient management. The purpose here is to outline a standard cost finding system for steel foundries, in a manner that makes it easily understood by the practical foundryman. The language of the cost accountant has been con- verted so far as possible into every-day language, thereby eliminating terms and expressions which sometimes cause difficulty in understanding the principles of cost accounting. Every foundry executive should pos- sess knowledoe of these principles for application to his business. Due to the enormous capacity of the foundry industry, a very keen competitive condition exists. Hence, ‘he concerns that are to prosper will be those who have an intimate knowledge of the cost of doing business. ind who use cost finding methods accepted as uniform in their industry. Uniformity in cost finding meth- sds among members of an industry such as the steel casting industry is without any question very beneficial in promoting intelligent trade practices. The uniform cost system in this pamphlet is the result of much intensive study given to the subject »f steel foundry cost accounting by the members of the Steel Founders’ Society of America. This organi- zation of companies manufacturing steel castings has been interested in proper cost accounting principles for ‘he steel foundry industry, during a period of more than twenty years. The first uniform cost system in the ‘oundry industry was, so far as we have been able to determine, published by the Steel Founders’ Society of America in 1005. That early foundry cost system was about the same in principle as the foundry cost sys- ems which appeared later in numerous publications. In 1919, another uniform cost system embodying a greater amount of experience with steel foundry costs, was published by the Steel Founders’ Society of America. This differed from the original cost system as the experience warranted the changes made in it. During all these years, this organization has devoted much time and effort to the subject, and this publication is issued to promote the use of uniform cost accounting principles in the steel foundry industry. November, 1927. STEEL FOUNDERS’ SOCIETY OF AMERICA, 511 Magee Building, Pittsburgh, Pa. USES OF AN EFFECTIVE COST SYSTEM The uses of an effective system of cost accounting in a foundry may be summarized thus: i. To ascertain the cost of making castings. 2. To measure the efficiency of labor. 3. To ascertain the consumption of materials and supplies. 4. To serve as a guide for correcting faulty operating methods. To provide the stimulus of chronological comparative records. To furnish data for intelligent merchandising. A foundry cost system that properly serves the above purposes must be practicable in operation. The data required by executives must be so arranged that they may be transmitted to operating and sales executives in a systematic manner, permitting quick and accurate analysis. From the above, it is manifest that cost accounting has three general functions to perform. It must provide data for the preparation of financial statements; it must serve the management in controlling opera- tions; and it must be a means for preventing a serious loss in meeting competition. UNIFORM COST FINDING METHODS Uniform methods of cost finding in an industry are without question very beneficial in promoting stability, business economy, efficient management, and lower costs. Uniform cost finding implies the use of the same principles and should not be construed as the use of standardized cost figures for an industry There are two fundamental requirements for uniform cost finding: viz., the use of a standard classi- fication of accounts and division of the business into departments, and the use of a uniform method of apply- ing indirect and overhead expense to individual castings. The first requirement insures the charging of all the elements of cost to the proper accounts or departments. The second requirement is an aid in the elimina- tion of great differences in costs among various foundries, which are caused chiefly by the use of different methods of applying indirect and overhead expense to individual castings. A uniform method of cost finding in an industry is especially advantageous for establishing marketing policies. Vast differences in the costs of making specific castings at various foundries are usually due more to the use of different methods of cost finding than to methods of production or other economic conditions. The only true and logical differences in costs that should occur are those caused by the local conditions at certain foundries which enable the production of castings at different costs from those at other foundries. Wide variations in costs due to the use of different cost finding methods are apt to be detrimental to the en- tire industry, and therefore, they should be minimized by the use of a more uniform cost-accounting practice, There will always be differences in costs of making castings at various foundries, but these differences should be caused only by certain local conditions such as location of plant, management, shop practice. purchasing, atc. ADVANTAGES OF A UNIFORM COST SYSTEM Among the many advantages offered by uniform cost accounting in an industry, the following are cited by the Department of Manufacture of the Chamber of Commerce of the United States in its pamphlet en- titled “Uniform Cost Accounting in Trade Associations”: Provides the ‘one best way’ known to the industry to figure costs (although cost accounting is a progressive science and provision should be made for keeping the uniform methods up-to-date) thereby eliminating expensive experimentation by the members of the industry individually and ‘ndependently. 2 4 Results in a better informed competition within the industry. inspires confidence in the public that selling prices are established by producers who have full «<nowledge of the costs of the articles offered for sale. ‘4. Tends to make the manufacturer, who otherwise would fail to see the advantages of good cost accounting, convinced of the desirability of adopting the methods which his competitors are suc- cessfully using. ‘s. Reveals lines of individual products which have been marketed on an unprofitable basis. “6. Provides in addition to the above specific reasons, all of the valuable features of good cost ac- counting generally, among which are the following: (a) Shows the danger line below which goods cannot be sold at a profit; thus serving as an in- surer of profits. (b) Acts as a guide to the value, efficiency, and waste of workers, machines, methods, opera- tions, and entire plants. (c) Provides a reliable guide and basis for estimating the cost of prospective business. {d) Furnishes current reports for comparing major cost items with standards which are prede- termined, and thereby measures and increases operating efficiency.” COST DIVISIONS OF THE FOUNDRY The Melting Department includes the cost of metals and the conversion cost. It controls all labor, in- cluding melting, handling, and preparation of scrap, furnace maintenance and repairs, connected with the fur- naces and with the ladles used for receiving the metal from the furnace spout; and the consumption of all materials and supplies used in conjunction therewith. Its province commences with the melting stock and fuel at the storage point and ends at the point where the metal is poured into or from the ladle used for re- ceiving the metal at the furnace spout. All items of cost incurred within these limits are charged to the Melt- ing’ Department. The Molding Department controls all the labor of molding, the maintenance of equipment, and the consumption of all materials and supplies used in conjunction therewith, Its province commences with the materials entering into molding sand mixtures at their point of storage and with the pouring of the metal into or from the ladle used for receiving the metal at the furnace spout. Its province ends with the delivery of the castings to the Cleaning Department. All items of cost incurred within these limits are charged to the Molding Department. It is important that the direct molding labor be segregated in a separate account in the Molding: Department. The Coremaking Department controls all the labor of coremaking, the maintenance of equipment, and the consumption of all materials and supplies used in conjunction therewith. Its province commences with the materials entering into core sand mixtures at their point of storage, and ends with the delivery of the fin- ished cores to the Molding Department. All items of cost incurred within these limits are charged to the Core Department. It is important that the direct cofemaking labor be segregated in a separate account in the Core Department. The Cleaning and Finishing Department controls all the labor of cleaning and finishing castings, the maintenance of equipment, and the consumption of all materials and supplies used in conjunction therewith. [ts province commences with the receipt of the castings from the molding department or pouring floor, and ends with the delivery of them to the shipping department. All items of cost incurred within these limits are charged to the Cleaning Department with the exception of annealing or heat-treating cost which may be con- sidered separately. It is important that the direct cleaning labor be segregated separately from the other ac- ;ounts in the Cleaning Department. The Heat Treating Department controls all the labor in connection with the annealing normalizing and other methods of heat-treating castings, the maintenance of equipment, and the consenptin of all mate. rials and supplies used in conjunction therewith. All items of cost incurred in the heat-treatment of castings are charged to the Heat Treating Department. The general expense includes all the items of cost and expense not enumerated in the above depart- ments and not chargeable specifically to those departments. Such expenses are: power, light and heat; gen- eral repairs not chargeable direct to the above departments; yard department; shipping; engineering; store: keeping ; purchasing ; production or order department; accounting department; inspection; safety and wel- fare; instirance ; taxes; depreciation; pattern department expense not charged direct to specific patterns or orders; loss on defective castings after shipment; general office expense; advertising; selling; loss on bad debts ; management salaries; officers’ salaries; traveling expenses; incoming freight not charged to material accounts or to departments in which materials are used; research; reserve for inventory adiustments; other operating reserves of a general nature: etc. CLASSIFICATION OF ACCOUNTS The following standard classification of cost accounts, based on the cost divisions of the foundry out- lined above, is recommended for steel foundries: Melted Metal Department: METALS: (See Note 1. Pig iron Purchased scrap Own scrap Ferro manganese FUEL: (See Note 1) Fuel oil for furnaces and ladles Ferro Silicon Iron ore Alloys (Gas for furnaces and ladles POWER: For electric melting furnaces SUPPLIES: Silica sand Coal Ladle brick Ladle loam Ganister Aluminum Waste Lubricants Incandescent lamps Bar iron and steel LABOR: Melters Helpers Chargers Stockers Drop operators FURNACE REPAIRS—IABOR: (See Note 2) Brick masons Masons’ helpers Lumber Nails Sleeves Stoppers Nozzles Furnace tools Oxygen Lime Chemical laboratory supplies and apparatus Electrodes for electric furnaces. (It is desir ble to have a separate account for this item.) Chemists =~ Ladlemen Melting department clerks Melting foremen Cranemen Steel workers Laborers FURNACE REPAIRS—MATERIAL: (See Note 2; Brick Sand Structural steel Castings Supplies OTHER REPAIRS—ILABOR Labor repairing all other equipment in Melting Department except furnaces OTHER REPAIRS—MATERIAL: Material and other charges for repairs to all other equipment in Melting Department except furnaces. Note 1. The cost of freight on materials used in this department, and the cost of unloading these materials are to be charged to the materials, or are to be charged to the Melting Department in a separate ac- count. The natural waste that occurs in the storage and handling of the metals and the discrepancies that occur in inventories, should be covered in the monthly cost of metals. This is done by adding a certain per- centage to the actual amount of each of the metals used, thereby avoiding the necessity for making large stock pile adjustments adversely affecting the business. The reserve for inventory adjustments explained on page 16 should not include an amount to cover reserve for metals, as the latter is charged direct to the cost of metals in the manner just outlined. Note 2. A reserve fund for furnace repairs should preferably be created by charging’ to costs each month an amount based upon a predetermined rate per ton of metals charged into the furnaces. When actual repairs are made, they are charged to the reserve fund. The labor and material accounts for furnace repairs may be combined at the option of the foundry. Note 3. The costs of physical tests are to be charged to the Melting Department when the making of these tests is under the direction of the chemical laboratory, or to the general overhead expense when unde: ‘he direction of some other department. Molding Department: Molding Direct Labor Molders Apprentices Helpers Rammers Finishers Dry-floor molders Dry-floor helpers Molding Indirect Expense [ndirect Labor: Cranemen Chainmen Labor pouring and following heats Shakeout labor Flask fitters Sand reclaiming labor Mold-oven tenders Runner cup makers Core carriers Pattern carriers Tool-room labor Gagger-men Sand-mill labor Mold checkers Dry-floor laborers Other labor not charged to direct labor. Supervision: Foremen and assistant foremen in molding department Molding department clerks. Flasks: (See Note 4 below) Labor and material used for making new wood and metal flasks and repairing them, including bottom boards, plates and cross-bars. Other Repairs: labor and materials used for making repairs to all equipment in molding department except flasks referred to in the previous account. Molding Sand: Cost of molding sand including freight and unloading. Fuel: Cost of fuel including freight and unloading for mold-drying ovens. Supplies: Chaplets Nails . Bar iron and steel Gaggers Silica flour Molasses and glutrin Fire clay Flour Dextrine Other compounds used in molding sand mixtures Chains Belt dressing Lubricants Waste Air hose and fittings Incandescent lamps Bolts Clamps Shovels Riddles Brushes Lumber Rammers and rammer butts Tools Note 4. Preferably a reserve fund should be created for flasks by charging to costs monthly an amount based upon a predetermined rate per net ton of castings produced. The actual expenditures for new Aasks and repairs should be charged to this reserve fund. Core Department: Core Direct Labor Coremakers, apprentices, and any other labor in the Core Department that can be specifically fol- lowed and charged direct to a job. Core Indirect Expense Indirect Labor: Core oven tenders Plate handlers Cranemen Chainmen Sand-mill labor Sand-handlers Core carriers Core box carriers Other labor not charged to direct labor. Supervision : Foremen and assistant foremen in Core Departmen Core Department clerks. Repairs: . . Labor and material used for making repairs to all equipment in Core Department. Core Sand: Cost of core sand including freight and unloading “uel : Cost of fuel including freight and unloading for core ovens. Supplies : Nails Bar iron and steel Plates Silica flour Molasses and glutrin Sire clay Flour Core compounds Bolts “hains Brushes. Air hose and fittings Lubricants ‘ncandescent lamps lumber Shovels Riddles : T'ools Rammers and rammer butts Cleaning Department : Cleaning Direct Labor Floggers Saw operators Chippers Cutting torch operators Srinders Press operators (straightening castings) Machine work labor necessary to prepare castings for shipment “in the rough.” Cleaning Indirect Expense [ndirect Labor: Cranemen Chainmen Tool-room men Clean-up labor Tumbling barrel labor Truckers Velding labor Sand-blast labor Other labor not charged to direct labor. [he above distribution of direct and indirect labor in the Cleaning Department is suggested for use by steel foundries. Some foundries may find it desirable to change some item or items to direct or indirect labor, but all the above operations should be charged to the Cleaning Department con- sistently. Supervision : Foremen and assistant foremen in Cleaning Department Cleaning Department clerks. Repairs : Labor and material used for making repairs to all equipment in Cleaning Department. Supplies : Emery wheels Chisels and cutters Oxygen Acetylene and carbide Cutting and welding torches and tips Air hose and fittings Blasting abrasives lasting hose and nozzles ’neumatic hammers Nelding wire Welding carbons Saw-teeth and blades {ubricants Cutters for machine tools Chains {ncandescent lamps Brushes tTammers, sledges, and handles Fools Heat Treating or Annealing: Labor: Foremen, oven tenders, loading and unloading furnaces and other labor engaged in annealing castings. Fuel: Cost of fuel including freight and unloading used in annealing furnaces. Supplies : Cost of all supplies used in annealing department. Repairs: Cost of labor and material used for making repairs to annealing equipment. General Overhead: This includes all expenses of the business not enumerated in the foregoing accounts. Steam, Power and Light: Labor, material, supplies, and repairs used in operating power plant 2urchased power, except power for electric furnaces Water Yard: Labor, material, supplies, and repairs used in Yard Department. Also drayage, auto trucks. locomotive cranes, car demurrage, track maintenance and waste removal. [nspection : Inspectors examining castings. Pattern Department: Labor :—Foremen, assistant foremen, pattern makers, and other labor making, altering, and repairing patterns that is not charged directly to the customer, nor to Special Charges. Material and Other Charges :—Material, supplies, repairs to pattern shop equipment, and other pattern expense for making, alteriny, and repairing patterns that is not charged directly to the customer, nor to Special Charges. (Refer to section on Special Charges.) Safety, Casualty, Welfare, and Pensions. Shipping : _abor :—Shipping clerks and assistants, cranemen. chainmen, and other labor” in Shipping De- partment. Material and Other Charges: —Material, supplies. and other charges used in preparing cast- ings for shipment. General Repairs: Labor :—Repair department foremen and assistants, machinists, electricians, pipe fitters, and other labor repairing buildings, machines, and equipment of a general nature not applicable to the repair accounts in the departments mentioned previously. Material, supplies, and spare parts used in repairing buildings, machines, and equipment of a general nature not applicable to the repair accounts previously specified. Pattern Storage. Insurance. Taxes: moo ude all taxes except Federal and State Income Taxes. Loss on Defective Castings after Shipment: (See Note 5 below) Difference between the sales value and the scrap value of castings shipped to customers and re- jected, plus the freight, etc. Charges for work done by customers to make the castings meet their requirements. Cost of labor at foundry in making castings rejected and returned by customers suitable for acceptance by such customers. Depreciation: (See Note 6 below) For depreciation of entire plant and its equipment. Clerks’ Salaries: Includes salaries of all clerks and stenographers, except department clerks in the metal, mold- ing, core, and cleaning departments. Accounting Department: Salaries, wages, material, supplies, and other charges used in operating the accounting depart: ment, Management Salaries: Works manager, assistant works manager, general superintendent, etc. “ngineering Department: Salaries, wages, material, supplies, and other charges used in operating the engineering depart- ment, Purchasing Department: Salaries, wages, supplies, etc., used in oy erating the purchasing department. Miscellaneous Operating Expense: Labor :—Wages of employes engaged in work of a general nature and not otherwise specified, such as watchmen, janitors, police, experimental, and development. Material :—Material and supplies of a general nature and not otherwise specified, such as tele- phone, telegraph, stationery, ice. lauadry, traveling expense of operating men, etc. [nventory Adjustment: Reserve fund for inventory adjustment to be created by charging to costs monthly an amount based upon a predetermined rate per net ton of good castings produced. Administrative Expense: Salaries and expenses of executives Head office rental Legal expense Subscriptions Dues Directors’ fees Expense: Salaries and commissions of salesmen Traveling expense of salesmen Clerks, stenographers, and others in sales department Advertising Note 5. Preferably a reserve fund for loss on defective castings after shipment should be created by charging to costs monthly an amount based upon a predetermined rate per net ton of good castings, or an imount based upon a predetermined percentage of total sales to customers. Note 6. Depreciation should be provided for regularly each month upon some definite and suitable sasis. and charged to monthly costs. Note 7. A reserve fund for doubtful accounts or bad debts should be created by charging to costs monthly an amount based upon a predetermined percentage of total sales, or an amount based upon a prede- termined rate per net ton of good castings. Special Charges: Pattern Expense: Labor: —Wages of pattern makers and other labor making, altering, and repairing pattern equip- ment that is charged direct to a specific pattern. Material and Other Charges: —Material and supplies used for making, altering, and repairing pattern equipment that is charged direct to a specific pattern. Also the cost of patterns, templates, and gauges purchased from outside concerns. Special Rigging: Labor :—Wages of labor engaged in making special equipment or rigging that is charged direct to a specific pattern, or to castings made from a specific pattern, Material and Other Charges:—Material and supplies used in making special equipment or rigging that is charged to a specific pattern, or to castings made from a specific pattern. Special Machining : Labor, material, and supplies in connection with special machine work that is charged direct to a specific pattern, or to castings made from a specific pattern. PRODUCT OF METALS CHARGED INTO FURNACE : Good Castings: The weight of the good castings produced is obtained by adding to the weight of the castings shipped during the month the weight of the castings on hand at the close of the month, and deducting therefrom the weight of the castings on hand at the beginning of the month. [f this method is followed, inventories should be obtained by weight or count, and should not be blanket estimated. Defective Castings: The weight of the defective castings is obtained from the defective casting reports and it repre- sents the castings scrapped in the foundry, It should not include defective castings returned to the foundry by customers, as such losses are included separately in General Overhead “xpense. ‘This item does not include the heads and gates on defective castings. Slagged Castings: The weight of the castings slagged at the end of heats. is also obtained from the defective cast- ing reports. "Jeads and Gates: The weight of the heads and gates is obtained by actual weights wherever practicable. When it is not practicable to weigh heads and gates, their weight is obtained by deducting from ‘he total furnace charge the sum of the weights of the good castings, the defective cast- ngs, the slagged castings, the metal losses, and the melting and foundry loss. This item ‘neludes the heads and gates on defective castings. Metal Losses: This item includes steel poured from the furnace that is later recovered as scrap in the form of lost heats, spills, skulls, runner cup scrap, fins, steel poured into pigs, and other scrap chat is recovered. Experience has demonstrated that this metal loss is usually 3 percent to ¢ percent of the total metal charged into the furnaces. I'otal Scrap: This item is the sum of the weights of the defective castings, slagged castings, heads and gates, and metal losses. The weight of the total scrap produced during the month is a known quantity as it is obtained by adding to the weight of “Own Scrap” charged into the fur- nace during the month. the weight of “Own Scrap” on hand at the end of the month. and leducting from this sum the weight of “Own Scrap” on hand at the beginning of the nonth. “Own Scrap” means steel poured from the furnace that is later recovered as scrap from the manufacture of castings, that is, it is all scrap which is returned to the fur- races for remelting. Melting and Foundry Loss: This item represents all metal that is lost and cannot be recovered, such as oxidation loss dur- 'ng melting, oxidation loss during annealing, fins and spills lost in heap sand, metal re- noved and lost as dust in grinding castings, oxidation loss during the removal of heads and gates by gas cutting, and other metal unaccounted for. This melting and foundry loss can se determined periodically from calculations involving inventories of “own scrap,” the veight of the castings scrapped during the period, the weight of the good castings pro- duced during the period, and the total amount of all metals charged into the furnaces dur- ‘ng the period. It is usually from 7 percent to 10 percent of the metal charged for foun- Iries operating open hearth furnaces or electric furnaces, and from 18 percent to 22 per- ~ent for foundries operating converters. ['otal Charge: The total charge is the total weight of the metals charged into the furnaces during the month. This is obtained from the heat reports and it represents actual weights of metals used. ACCOUNTING FOR MATERIALS, SUPPLIES AND OTHER CHARGES Data for the various items in the Standard Classification of Cost Accounts pertaining to the cost of materials, supplies, and other charges, are obtained from heat reports, monthly inventories, stores’ requisi- ions, voucher records, and reserve accounts in the cost ledger. It is important that these charges be cor- rectly classified and applied to the proper cost accounts. ACCOUNTING FOR LABOR Labor is of the greatest importance to the foundrymen because it is most potent in contributing oward the success or failure in making castings. It is one of the items most susceptible to manipulation and ‘conomy. The method of collecting labor data for the cost accounting records is very important, unless it is per- ‘ormed with accuracy and ease the results are unreliable and misleading. Since the costs of individual cast- ngs are dependent largely on correct lahor costs. it is evident that incorrect labor data mav lead to disastrous ost finding. .-. The labor data for the various accounts given in the Standard Classification of Cost Accounts, are obtained from the records used for distributing the time or service records for all employes to the different iccounts in each department, that is, the classification of labor according to its nature. Data for employes -eceiving salaries are obtained from the salarv roll DEPRECIATION . Depreciation of the plant and equipment must be charged into current costs of production as it is an tem of expense. The need of charging depreciation to current costs arises from the fact that working assets -radually give out cr become obsolete, or in other words, they are used up in production, and the cost of this 1sage or consumption of capital is part of the cost of the product being manufactured. The test for depreciation is how long the property will function, how many units it will produce before it is scrapped or becomes obsolete, and what will be its cost of replacement. When this question is answered, ‘hen the amount of depreciation—which is the actual cost of the property less any salvage—to be charged ‘0, current costs can be determined. This charge to costs for depreciation cannot be abandoned simply because profits are non-existent. for depreciation accrues whether or not there is a dollar of profit. [t is preferable that depreciation be accumulated in a depreciation reserve account, charging costs of production each month and crediting the depreciation reserve in the general ledger. This reserve is directly iffected when renewals are made and when the property is exchanged, sold, replaced, or abandoned. CAPITAL AND REVENUE EXPENDITURES In cost accounting practice it is necessary that intelligent decisions be made as to the ultimate disposi- ion of expenditures, that is, whether they are chargeable to the asset accounts or to the current cost ac- rounts. Those charged to the asset accounts are capital expenditures, and those charged to the cost accounts ire Mevenue expenditures. Capital expenditures apply to such expenses as, in the aggregate, represent the cost of the increased :arning capacity of the plant as a whole or of particular parts thereof, which has been secured over the earn- ng capacity known to exist before the said expenses were incurred. Revenue expenditures, which are charged to current costs of production, apply to such expenses that nust be incurred in order to obtain advantage of the earning capacity of the plant or of particular parts there- if, in order that such capacity may be maintained at the required standard. OPERATING RESERVES Operating reserves measure the amount of the cost of operations which, while not necessarily ex- sended at the present time, will positively be incurred according to past experience. They represent costs of production incurred and unpaid, and the only connection they have with surplus is that, if unnecessarily high. ‘hey will be sent in part to the credit of the surplus account in order to remove any prejudice that it has wiffered through over-conservatism in the charges to current manufacturing costs. The following reserve accounts are recommended for use in the modern steel foundry cost accounting wvstem Reserve for Depreciation. A definite sum is charged to manufacturing costs, under General Overhead Expense, each month, and the same amount is credited to the depreciation reserve account in the ledger. Reserve for Furnace Rebuilding and Repairs. A definite amount per net ton of metal charged into the furnace is charged to Metal Department costs monthly, and this same amount is credited to the reserve account in the ledger. As expenditures are made for furnace rebuilding and repairs they are debited to the reserve account in the ledger. The debits to this ledger account and the ‘onnage charged during a period, form the bases for establishing the rate per net ton of metal charged to be absorbed in costs monthly. Reserve for Flasks. A definite amount per net ton of castings produced is charged to Molding De- partment costs each month, and the same amount is credited to the reserve account in the edger. As expenditures are made for new flasks and repairs, thev are debited to the reserve account in the ledger. Reserve for Doubtful Accounts. A definite amount per net ton of good castings or a definite percen- tage of total casting sales, is charged to costs each month under General Overhead Expense, and she same amount is credited to the reserve account in the ledger. As had debts accur thev are lebited to the reserve account in the ledger. Reserve for Loss on Defective Castings After Shipment. This covers losses from returned castings and losses from work done on castings, the cost of which is charged back to the foundry. A efinite amount per net ton of good castings or a definite percentage of total casting sales, is charged to costs each month under General Overhead Expense, and the same amount is cred- ited to the reserve account in the ledger. As losses on defective castings after shipment from ‘he foundrv occur thev are debited to the reserve account in the ledger. Reserve for Inventory Adjustments. A definite amount per net ton of good castings is charged to costs each month under General Overhead Expense, to provide for adjustments in inventories that occur each year. The same amount is credited to the reserve account in the ledger. As adjustments are made they are debited to this reserve account. The reserve for adjustment of inventories of metals is charged direct to the cost of metals as explained in Note 1 on Page 8. In addition to the above which represent the major items to be dealt with as reserves, there are others such as the following which may be taken care of as reserves by charging a fixed amount to costs each month ander General Overhead Expense: Subscriptions and Dues, Donations, Legal and Auditing Expense, Prop- orty Taxes, Insurance, Research, etc. SURPLUS RESERVES Surplus reserves, or simply surplus, are in effect a group of accounts which show the value of the equity belonging to stockholders over and above the par value of the outstanding shares of stock. They arise ‘rom net profits, and they are needed for such purposes as the following: Purchase and installation of new >quipment to keep the plant up to date; General plant improvements; Federal Taxes; Business depressions; Regular payment of dividends during periods of good and bad business; Interest on notes and bonds ; Sink- ng funds for retirement of notes, bonds, and stocks; Plant extensions; Contingencies, etc. Proper cost accounting methods and uniform principles of establishing overhead or burden rates and heir application in determining the costs of individual castings, are important means for enabling a foun- iry to set up and maintain surplus reserves which are necessary for the efficient conduct of a business and vhich must be established from profits. COST OF SALES The cost of sales must be determined from the cost accounting system and it is necessary for determin- ing the profit or loss of the business. It represents the cost of castings shipped or invoiced to customers dur- ng the month, and may be obtained in the manner outlined below. To be conservative, it is recommended ‘hat the normal cost per ton used for pricing the inventory be reduced by an amount estimated as being the cost of cleaning the castings represented by the inventory. The castings on hand at the beginning of the month, or the book inventory, are priced or can be priced by using an average total cost per pound or per ton for an average period of business. This will prevent fluctuations from month to month. The castings produced during the month are priced at the total cost per pound or per ton for that month. 3. The castings on hand at the end of the month, or the shop inventory, are priced in the same man- ner as the pricing of the castings on hand at the beginning of the month. t. The cost of sales for the month is the value of the book inventory (castings on hand at the begin- ning of the month) plus the value of the castings produced during the month, less the value of rhe shop inventory (castings on hand at the end of the month). This is the total cost of sales. The net profit or loss is obtained by using the total cost of sales and the total net sales for the period. [. AVERAGE OR NORMAL COSTS Average or normal costs mean those representing average conditions of business, and they should al- ways be used for establishing the overhead or burden rates necessary for determining actual and estimated :osts of individual castings. This is true whether or not the average costs are higher or lower than the actual prevailing costs of carrying on the business during the various fluctuations in the rate of operation of the foun- Irv caused by changing conditions of general business. The expense which is logically chargeable to a casting is that required for its manufacture when the slant is operated under average conditions, because the actual effort and use of the foundry’s facilities re- juired for making a casting are no less when the plant is operating at maximum capacity than when it is operating at a reduced rate. The total cost for the entire foundry per ton of castings produced is lower than ‘he average cost during abnormal business conditions, and is higher than the average cost during subnormal business conditions. However, this does not mean that the cost of making an individual casting varies in :he same manner as the actual total cost for the entire output, that is, it is not affected by general business conditions in the same manner as the latter. Therefore, the overhead or burden rates for use in obtaining costs of individual castings must be computed from a summary of costs representing average business condi- tions, meaning good, fair, and bad conditions, or, in other words, high, medium, and low rates of operation of the foundry. This summary of costs to be used might be an average of the costs for three years constituting 1 good year, a fair year, and a poor year, with respect to general business and foundry operations. It is very assential that this principle of using average costs covering average business conditions be used in practice, par ticularly for determining the costs upon which selling prices are based. MONTHLY SUMMARY OF COST OF PRODUCTION A summary of the cost of production should be prepared each month. This summary should be com- siled and arranged in accordance with the standard classification of accounts on page 7, although it is not nec- :ssary that each account be listed in the summary. The accounts may be condensed in a manner similar to hat illustrated on the sample Monthly Summary of Cost of Production of Good Castings shown on the pages following. Many foundries supplement the Monthly Summary of Cost of Production of Good Castings with 1dditional records giving in greater detail the items of cost used for compiling the summary, or they expand ‘he Monthly Summary of Cost of Production to have it include more items than are shown on the sample Illustrated here. Additional columns may also be added to it to provide for the inclusion of data for compari- son purposes such as the costs per ton for the previous month, standard costs, best performance, etc. The Monthly Summary of Cost of Production of Good Castings given on the pages following is in- serted merely to illustrate the application of the cost finding principles advocated. All the figures on it are as: sumed, and each foundry must use its own cost data by following the procedure illustrated by the use of the 1ssumed data. COST OF STEEL AND OVERHEAD RATES FOR INDIVIDUAL CASTINGS (a) Cost of Steel The cost of steel per net ton of good castings is not the same for every casting, but it varies with the vield of good castings in percentage of metal charged into the furnace. Therefore, it is necessary to deter- mine the vield for the casting whose cost is to be determined. This is a very important point. THE YIELD IS THE PERCENTAGE OF TOTAL METAL CHARGED INTO THE FUR- NACE THAT RESULTS IN GOOD CASTINGS. To obtain the yield for a specific casting, the following lata must be known: shipping weight of the casting, the weight of the heads and gates used on the casting, ind the number or weight of the defective castings including the heads and gates on them. The yield for the ‘asting can then be calculated very quickly by using the following formula: Per cent. yield _GxDoo—(S+L+B)] in which G+L-DJ4+H G = shipping weight of castings in pounds. This is 3000 pounds for the sample casting whose cost calcula- tion is illustrated on page 25. 3 = metal losses in percentage of the total metal charged. This percentage is obtained from the average cost summary and it is item 39 on the sample copy given for illustrative purposes on page 19. S is 3.00% in this summary. Monthly Summary of Cost of Cost Per Net | Total Cost per Net Ton Charged Amount oo Ton Good Castings Vet Tons Charged Price Per Net Ton MELTED METAL pigIron 120 25.00 Purchased Scrap | 647 | 18.00 dwn Scrap | 410 13 .00 Ferromanganese i 12 98.00 Ferrosilicon #2 78.00 fron Ore Tas Special Alloys Total Metals | 1200 Labor LL Fuel . oo Power KWH per KWH Electrodes } 1bs. Supplies vy Furnace Repairs oo co Other Repairs Cg Total Metals and Conversion . 28.14 Less Scrap Recovered 420 Tons (@ 13.00 per Net Ton Total Melted Metal To . CT DIRECT LABOR Molding Core Cleaning and Finishing Total Direct Labor INDIRECT EXPENSE MOLDING Indirect Labor Sand Mill Labor Pouring Labor (Shank Ladles) Sand Sand Mixture Ingredients Fuel Supplies LL Flasks Repairs Supervision So ~ Total Molding Indirect CORE Indirect Labor CL Sand Fuel Supplies Repairs LL Supervision Total Core Indirect oo } CLEANING AND FINISHING Indirect Labor Supplies ~~ Repairs : Supervision Total Cleaning and Finishing Indirect ANNEALING . Labor Fuel and Supplies oo _ Repairs . } oo - Total Annealing _ 2.50 | 3,000.00 _ 92.7 11,646.00 4.44 5,330.00 ‘os 1,176.00 39 1 TT 4e8.00 02 22.50 4.55 17.64 8.08 - 1.78 71 .04 ¢l,bac.. 5,040.00 4,320.00 oe. 8U 7.64 6.54 1,200.00 1,080.00 480.00 33,762.50 _ 5,460.00 28, 302.50 1.82 1.64 TD 51.16 — 8.27 — 42.89 11,880.00 3,300.00 6,600.00 21,780.00 18.00 5.00 10.00 — -3.00 6,600.00 660.00 10.00 1.00 of 1.188.00 396.00 264.00 924.00 330.00 ~ 1,254.00 1,584.00 77,900.00 1.80 .60 40 1.40 ~ 50 TD 2.40 1,320.00 462.00 ~ 594.00 © 990.00 495.00 528.00 "4,389.00 2.00 70 90 ~ 1.50 - ml T— 2,244.00 3.40 4,620.00 7.00 825.00 1.25 660.00 1.00 _ _ 8,349.00 _ 12.66 726.00 1.10 1,320.00 2.00 99.00 iB » 2145.00 | — 3.25 Tarward 73 1685 BO 118 44 Production of Good Castings Brought Forward GENERAL OVERHEAD EXPENSE Steam, Power, and Light Yard Inspection _ Pattern Department Safety, Casualty, Welfare, and Pensions Shipping General Repairs Pattern Storage Loss on Defective (Back Charges, Returned Castings) Miscellaneous Operating Expense Insurance Co Taxes Depreciation Clerks’ Salaries Accounting Department Management Salaries Engineering Department Purchasing Department Inventory Adjustment Administrative Expense Selling Expense Total SPECIAL CHARGES Patterns and Gauges Special Rigging ~~~ 000 Special Machining Total Special Charges ~~~ Total Cost Total Cost per Net Amount | Ton Good Castings 78,165.50 118.44 6 3,300.00 1,320.00 © 990.00 2,640.00 660.00 1,980.00 3,300.00 330.00 3,564.00 3,168.00 1,980.00 660.00 © 3,960.00 1,980.00 990.00 3,300.00 990.00 825.00 330.00 4,620.00 4,455.00 45,342.00 "123,507.50 5.00 . 2.00 — 4.00 1.00 3.00 _ 5.00 0) _ = 5 _ — 0 7.00 v.00 ~.00 ..50 5.00 1.50 1.25 ~.B0 7.00 6.75 68.70 TTT renee 250 .20 1.12200 ~~ 1770 "124,620.50 | “188.84 PRODUCT OF METALS CHARGED INTO FURNACES GOOD CASTINGS Good Castings (yield) Scrap: Defective Castings 38. Slagged Castings | Heads and Gates 39] _ Metal Losses Total Scrap tol Melting and Fdry. Loss ,_ Total Charge Percent Net Tons | of Total Charge 55.00 Net Tons On Hand First of Month Produced During Month Total _ Shipped During Month On Hand Last of Montt 44.4 3.70 &.6 | 0.30 HE 2&.00 3.00 35.00 ~~ 70.00 _ 1xud 100.00 3 oo OVERHEAD RATES FOR COST OF INDIVIDUAL CASTINGS | 100 X (Item 12 minus Sum of Items 8, 9, 10 and 11) divided by Item 4=92% of Molding Molding Overhead Direct Labor. = °° | sumof Items 8, 9, 10, and 11=%$3.40 per Net Ton of Good Castings. Core Overhead=(Item 13 divided by Item 5)X100=133% of Core Direct Labor. Cleaning and Finishing Overhead=(Item 14 divided by Item 6)X100=126.5% of Cleaning and Finishing — DirectLabor. = _ Annealing =Item 15=%3.25 per Net Ton of Good Castings. | (Sum of Items 26 to 36 incl. divided by Item 7) X 100=110.6% of Total Direct Labor. General Overhead Sum of Items 16 to 25 incl.=$32.20 per Net Ton of Good Castings. | Minimum=Item 37 divided by Maximum Production=45, 342. 00+ 950=$47. 73 per Net Ton NoTeE—AIll figures given in this cost summary are assumed. and thev are used onlv for illustrating the erierinlac adcmmntad no 0 i, = melting and foundry loss (all metal unaccounted for) in percentage of the total metal charged. This percentage is obtained from the average cost summary and it is item 40 on the sample copy for illustrative purposes on page 19. L is 10.00% in this summary. 3 — slagged castings in percentage of the total metal charged. It is item 38 on page 19. Bis 0.3% in this illustration. D = weight of defective castings in pounds. The weight of a defective casting is the same as the shipping weight of a good casting. This weight is 600 pounds for the sample casting whose cost calcula- tion is illustrated on page 25. d — weight of heads and gates used on both the good and the defective castings, in pounds. This weight is (800 pounds for the sample casting whose cost calculation is illustrated on page 25. The formula used for calculating the yield of a specific casting or castings made from a specific pattern san be stated in simple terms making it more easily understood. The yield is calculated by multiplying the shipping weight of the casting or castings (G in the formula) by the difference between 100% and the sum >f the average percentages for metal losses (S), melting and foundry loss (L), and slagged castings (B). This result is then divided by the sum of the weights of the good castings (G), the defective castings (D), and the heads and gates used on both the good and the defective castings (H), which gives the yield. In the above formula, the terms S, L, and B are constant as they represent average figures taken from ‘he average cost summary representing average or normal operations of the foundry. The other terms vary with the casting whose cost is to be determined. By substituting the proper figures for the letters in the above formula, the yield for the casting illustrated on page 23, is calculated to be 48.2%. The use of this simple method for determining the yield for a specific casting is illustrated later on page 23. The cost of steel per net ton of good castings varies with the yield, and it includes two main items: the cost of metals (item 1 on page 18), and the conversion or melting cost. The cost of metals should be based on the market prices of the metals used for making the steel. The conversion or melting cost (this is item 2 ‘ess item 1 on the average cost summary, page 18) should be the average cost representing average or normal yperations in the foundry. This average conversion cost should always be used instead of the actual conver- sion cost for any single month. It is calculated in the following manner by using for this illustration the as- sumed figures on the average cost summary on page 18: Average Amount Prevailing Cost Per Net Per Net Ton of Charge Cost Per Unit Ton of Charge .... 6 man hours 7oc an hour...........$ 4.20 60 gallons 6c a gallon........... 3.60 1.00 90 .40 labor LL... Fuel ......ovoonnt. Supplies ........... furnace Repairs ................ “ther Repairs in Metal Department. . Total average conversion cost per net ton charged. .$10.10 [nn calculating the average conversion cost for electric furnaces the average kilowatt hours and pounds of elec- rodes per net ton of charge would be used in the manner illustrated above. Also the average cost per kilowatt- Jour representing average operating conditions should be used. To obtain the cost of steel for a specific casting, its yield is calculated from the formula given above, nd the cost of steel can then be quickly calculated from the following formula: } 100 M — [P Xx (100 —L)] Cost of steel per net ton of good castings =— - -LP M = total metals and conversion cost per net ton of metal charged into the furnace. It is item 2 on the sam- ple copy of an average cost summary illustrated on page 18, which should be adjusted with the market prices of metals. _ ., = melting and foundry loss (all metal unaccounted for) in percentage of total metal charged into the fur- nace. Tt is item 40 on the sample copy of an average cost summary illustrated on page 10. P = value of recovered scrap in dollars per net ton of scrap. This price of scrap is item 3 on the average cost summary illustrated on page 18. Y = yield of good castings in percentage of metal charged into the furnace. This is calculated from the formula for yield given previously. The easiest and most convenient way to obtain the cost of steel for individual castings is to construct a table each month based on market prices of metals and showing the cost of steel for various yields. After calculating the yield for the casting whose cost is to be determined, reference to such a table will give the cost of steel per net ton of good castings. This table is constructed by using the formula given above. The follow- ing illustrates the use of the formula for constructing the table of steel costs: M in the formula, which is item 2 in the cost summary on page 18, is $28.14 L, in the formula, which is item 40 in the cost summary on page 19, 1s 10.0% P in the formula, which is item 3 in the cost summary on page 18, is $13.00 } 100 X 28.14) — [13 X (100 — 10)] Cost of steel per net ton of good castings = (106 —+ 13. 1644 Cost of steel per net ton of good castings == ——— 4 13. By substituting values for Y (yield) from 21 to 80, the following table is the result: COST OF STEEL PER NET TON OF GOOD CASTINGS FOR DIFFERENT YIELDS Yield 21 Cost of Steel ner Net Ton 91.30 *1.75 24.50 $0.50 16.2. 72.90 75 0 iN 1 6. RO.6G0 3 Cost of Steel ' Yield | per Net Ton 26 dj 58.70 57.50 56.30 85.50 t r 0.91) Yield 1 s Cost cf Steel per Net Ton 15.30. 14.60 14.10 £3.40 12.90 2.40 90 40 0. € $ i : i Cost of Steel Yield per Net Ton 66 F 37.90 37.60 37.20 36.80 26.50 56.20 5.20 5.50 ER) 34.90 34.70 34.40 BH 34.10 33.80 23.60 ae The above procedure is for the regular carbon steel. The cost of allov steel is obtained by adding to he cost of carbon steel. the additional cost of the allovs used. (b) Overhead Rates The method of establishing overhead rates and applying them when determining the costs of individ- ual castings, should be standardized throughout the steel foundry industry. Uniform methods to be used by all the members of the industry are very essential if vast differences in costs caused bv the use of different cost inding methods are to be prevented. There are five main overhead rates to be used for calculating the cost of an individual casting, in addi- don to the cost of steel mentioned in the foregoing. These are: molding overhead, core overhead. cleaning overhead. annealing cost. and general overhead. MOLDING OVERHEAD. There are two rates to be used for applying the molding overhead to an ndividual casting, and both are used when calculating the cost of a casting. One is a percentage of molding jirect labor, and the other is a fixed rate per net ton of good castings. All the molding indirect expense in ‘he standard classification of accounts on page 8 with the exception of molding sand, material and supplies 1sed in molding sand mixtures, sand mill labor, and pouring labor where hand shank ladles are used, are to be applied to a casting as a percentage of the molding direct labor. Therefore item 12 ($20.00) on the average cost summary on page 18, less the sum of items 8, 9, 10, and I1 ($3.40), divided by item 4 ($18.00), and the result multiplied by 100, gives one molding overhead rate of 92% of the molding direct labor in this example. The other molding overhead rate to be used along with the percentage rate, is the sum of items 8, 9, 10, and r1. which in this case is $3.40 per net ton of good castings. CORE OVERHEAD. The core overhead rate is established in a manner similar to the molding over- read rate, that is, the core department indirect expense is a percentage of the core direct labor. Item 13 $6.65) divided by item 5 ($5.00) and the result multiplied by 100, gives a core overhead rate of 133% of the ~ore direct labor. CLEANING OVERHEAD. The cleaning overhead rate is established in the same manner as the nolding and core overhead rates, that is, the cleaning department indirect expense is a percentage of the clean- ng direct labor. Item 14 ($12.65) divided by item 6 ($10.00) and the result multiplied by 100, gives a clean- ng overhead rate of 126.5% of the cleaning direct labor. ANNEALING COST. The annealing cost is a rate per net ton of good castings to be applied to all -astings annealed. It is item 15 on the average cost summary, which in this instance is $3.25 per ton of good ~astings. GENERAL OVERHEAD. Two rates are used for the general overhead expense defined in the standard classification of accounts on page 11; that is, the general overhead expense is divided into two rates 1nd both of them are used when calculating the cost of a specific casting. One is a percentage of the com- sined molding, core, and cleaning direct labor, and the other is a fixed rate per net ton of good castings. The following items of the general overhead expense are to be applied to a casting as a percentage of the com- bined molding, core, and cleaning direct labor: insurance, taxes, depreciation, salaries, administrative ex- sense, and selling expense. All the other items comprising the general overhead expense are to be applied to 1 casting as a fixed rate per net ton of good castings. Refer to the average cost summary on page 19 for the division of general overhead expense into tonnage charge and direct labor charge. The rates for the general overhead expense like the overhead rates mentioned in the foregoing para- sraphs for the productive departments, must be established from average costs representing average operat- ng conditions in each foundry. If it is assumed that the cost summary on page 18 which contains assumed jgures, represents average costs, the determination of the two general overhead rates is illustrated in the ‘ollowing: The sum of items 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 and 36, is $36.50, and this divided by item 7 '$33.00) and the result multiplied by 100, gives one rate for the general overhead as 110.6% of the combined molding, core, and cleaning direct labor. Item 37 ($68.70) less $36.50 gives $32.20 per net ton as the other rate {or the general overhead. There is a certain minimum general overhead cost per ton for each foundry that should be taken into .onsideration when calculating the cost of a casting. It is to be used when the general overhead cost obtained yy computing it with the use of the two general overhead rates mentioned above, is less than the established ninimum general overhead cost per ton. Fach foundry should establish its minimum general overhead ex- sense per ton by taking its average general overhead expense in total amount and dividing this by the maxi- mum number of tons of good castings that could be produced, taking into consideration the factors that limit the output of the foundry. If the average general overhead expense (item 37 on page 19) during average sonditions of operation is $45,342.00 as shown on the average cost summary on page 19, and the average num- her of tons of good castings produced during normal conditions in the foundry industry is 660, it may be possi- ble for the foundry to produce as much as 950 tons of certain kinds of castings. Therefore, the minimum gen- .ral overhead expense to be used when calculating the cost of a casting, is in this example $45,342.00 divided 3y 050 or $47.73 per net ton of good castings. The above procedure illustrates the manner in which each foundry should use its own average cost data for establishing the cost of steel and the overhead rates to be used for calculating the costs of castings made from individual patterns. COST OF INDIVIDUAL CASTINGS Knowledge of average monthly costs of making castings is not enough, and it is essential that further analysis of the business be made by studying the costs of making castings from specific patterns. Without the nformation obtained from job costs, the foundryman has no guide to aid him in keeping the costs of making pecific castings at a minimum or in eliminating from his business those jobs that cannot be made at a profit. It is not a complicated procedure to get the actual and estimated costs of castings made from individual patterns. A full explanation of it is given here. The following basic data must be obtained for each casting whoses cost of production is to be deter- nined: shipping weight, weight of heads and gates, weight or number of defective castings, molding direct bor, core direct labor, and cleaning direct labor. The molding, core, and cleaning direct labor are defined in the standard classification of accounts given on page 7, and it is very important that these direct labor data he correctly determined. The shipping weight, weight of heads and gates, and weight or number of defective -astings, are the data necessary for determining the yield and consequently the cost of steel in the casting as explained on page 17. The molding direct labor, core direct labor, and cleaning direct labor for the specific casting, are the data required for determining the indirect and overhead expense applicable to the casting by 1sing the overhead rates explained on page 22. The method of calculating the cost of a casting or castings made from a specific pattern is illustrated on the page following which contains a sample job cost form. All figures in this example are assumed. The overhead rates and cost of steel are taken from the assumed data on the Monthly Summary of Cost of Produc- on of Good Castings on page 18, and they are described in the section beginning on page 17. In the case of alloy steel, an addition must be made to the cost of the regular carbon steel, to cover the axtra cost of the alloys used. If the amount of defective castings is added in the form of a percentage when determining the cost of ;astings made from a specific pattern, it should always be stated as a percentage of the good castings. This sercentage should never be a percentage of the total castings, meaning the sum of the good and the defective ~astings. The yield for the castings described on the Cost Record following, is obtained by using the following ‘ormula described on page 17: Gx [00—(S+L+B)] Per cent. yield = ——m———————— — G LDL H The figures for S, L, and B, in this-formula are obtained from the Monthly Summary of Cost of Production »f Good Castings, and using the assumed figures on page 19, S is 3 percent, L, is 10 percent, and B is 0.3 per- sent. Therefore. the formula for yield is reduced to the following in this instance: 86. G Per cent, yield = _Se7 X © G 4+ DL H Each foundry must establish this simple formula by using its own data for the terms S, I, and B, and it is asually desirable to insert it on the Cost Record for quick reference and use in calculating the vield for cast- ings from a specific pattern. The term G in the formula is the shipping weight of the castings and in the example on the Cost Rec- ord this is 3000 pounds. The term (G 4 D 4 H) in the formula is 5400 pounds in the illustration. There- 86.7 XX 3000 fore, the yield for the castings from this pattern is — —— = 48.2% 5400 The cost of steel per net ton of good castings is obtained for these castings having a yield of 48.2 per- cent by reference to the table on page 21. Each foundry must establish this table by using its own data and by using the method explained on page 20, since all the figures are assumed in this description. In this illustration the cost of steel is $47.11 per net ton of good castings. Every casting should be charged with its share of the defective castings for the entire shop, since the average cost summary from which overhead rates are established contains the cost of the defective castings. Whenever there are no defective castings from a specific pattern, or the actual percentage of defective cast- ings from a specific pattern is less than the average percentage shown on the average cost summary used for establishing overhead rates, the average amount of defective castings in percentage of the good castings should be used in the job cost calculations. On page 19, the average amount of defective castings is oo X 100 or 6.7 percent of the good castings. This percentage was not used in calculating the cost of the castings on the Cost Record shown on page 25, because the actual amount of defective castings exceeds the average of 6.7 percent. A suggestion is made that all castings, whether or not they require cores, be charged with a fixed mini- mum cost per net ton for indirect labor and expense in the Core Department. This would be in the nature of a “readiness to serve” or “demand” charge; and it would be used if the Core Department overhead for a spe- cific casting obtained by calculating it as a percentage of the core direct labor is less than this predetermined minimum amount, and also when a casting requires no cores. Each foundry using this suggestion would be obliged to determine its own minimum Core Department charge per net ton of good castings. The Cost Record on page 25 is merely a suggested form to be used. Some foundries may wish to have 1 column for “Total Amount” which would be used for inserting the total dollars expended for each item, This column of figures might be more convenient to use by some foundries, particularly for the various items of di- rect labor when it is desired to have these items include the good and defective castings. The form illustrated shows the costs of the direct labor items per piece and per net ton of good castings, and the direct labor costs for the defective castings are added as a percentage. ACTUAL COSTS AND ESTIMATED COSTS The estimated cost of a casting and the actual cost of a casting are calculated in the same manner, except ‘hat the basic data are estimated in the former, while they are results of actual experience in the latter, Slight errors in estimated data on which the calculation of the total cost depends, have a great influence on the total cost. Therefore such data must be carefully determined when estimates are prepared. It is essential that the estimated data be compared with the actual data when the castings are produced, as this procedure will im- prove the estimating practice and it will also enable the discovery of costly errors, PROFIT The astounding percentage of business failures clearly shows the necessity for establishing selling prices which not only cover the complete cost of doing business, but also include sufficient profit to enable the com- pany to perpetuate itself and make new improvements. A company can be permanently successful only when the element of profit is given careful consideration before selling prices are established. It is necessary when making quotations to include an amount of profit sufficient to insure returns which will be large enough to assist in payment of dividends during periods of business depression which occur from me to time. COST RECORD ACTUAL OR ESTIMATED Customer Address Name of Casting Quantity No. of Castings Wei~ht per Cstg. Total Weight Good Castings (G) lo | 300 | 3,000 Defective Castings (D) a 300 600 Heads and Gates (H) 12 150 | 1,800 Total Weight (GTDTH) 5,400 . 86.7XG Yield= GIDTH =d8.2 % Defective =20% of Good Castings Pattern No. Drawing No. Date PATTERN EQUIPMENT No. of Patterns | No. Cores ner Ostq. Kind of Pattern Size of Flask No. Patterns in Flask Molding Method DETAILS OF COST Cost | Cost per per Piece Net Ton 7.07 | 47.11 Steel 48.2% yield _ Special Alloys DIRECT LABOR Molding Molders _ Apprentices _ Helpers Co Dry Floor Molders _ Dry Floor Helpers Defective Cstgs. 20% of above _Contingency 5% of above Total Molding Direct Labor Core Coremakers B Apprentices Helpers Defective Cstgs. 20% of above Core Break. & Cont. 10% of above Total Core Direct Labor Cleaning and Finishing 3 Flogging _ _-67 Removing heads and gates i 2.00 Chipping 3.00 Grinding _ 5 17 Straightening .15" 1.00 Cleaning defectives i Contingency 10% of above | .13 .87 ____ Total Cleaning Direct Labor /_ 1.38 | 9.21 Total Direct Labor . 5.20 | 41.36 TT Forward 15.27 1 88.47 Cost | Cost per per Piece Net Ton 13.27 ' 88.47 Brought Forward OVERHEAD _ Molding overhead: 92% of Molding Direct Labor + 3.71 | 24.75 $3.40 per Net Ton .51 3.40 Core overhead 133% of Core Dir. Lab, 1.05 | 7.00 Cleaning overhead 126.59 ofCleanDir.Lar "1.74 | 11.61 Annealing $3.25 per Net Ton .49 3.25 General overhead: Tl ~ 110.6% of Total Direct Labor 6.86 | 45.75 $32.20 per Net Ton "4.83 [32.20 Minimum $47.73 per Net Ton oo Total Cost of Good Castings SELLING SUMMARY Cost of Castings _ Special Charges Freight Returns and Allowances Machining Hazard Total Cost f. 0. b. Profit Selling Price Profit in % of Selling Price 216.43 Pattern Cost NOTE: All figures on this form are assumed. It is also very necessary when establishing selling prices, to include an amount of profit in addition to that required for dividends during periods of depressed business, sufficient to provide for a consistent develop- ment of the business and for the maintenance of surplus reserves. This is a fundamental economic principle upon which the permanent success of any industry must be based. This principle is often disregarded to the detriment of the entire industry. The answers to the two following questions are related to the subject of profit derived from the manu- facture of steel castings. Do the foundry and its stockholders pay for making castings or do they get paid for the efforts and capital expended in making castings? If they get paid for making castings, is their remunera- Hon commenstrate with the skill, risks, and hazards connected with the business? Hamburgisciies . Wel ohn. Archi king. 30. Apa. 1929 * Warp- nil T 219002 kL Y ; y im 1 i 52 0 nN J va A mo [4,1 > n \J — yx recial Charges: Pattern Expense: Labor :—Wages of pattern makers and other labor making, altering, and repairing pattern equip- ment that is charged direct to a specific pattern. Material and Other Charges:—Material and supplies used for making, altering, and repairing pattern equipment that is charged direct to a specific pattern. Also the cost of patterns, templates, and gauges purchased from outside concerns. Special Rigging: Labor :—Wages of labor engaged in making special equipment or rigging that is charged direct to a specific pattern, or to castings made from a specific pattern. Material and Other Charges: —Material and supplies used in making special equipment or rigging that is charged to a specific pattern, or to castings made from a specific pattern. Special Machining : Labor, material, and supplies in connection with special machine work that is charged direct to a specific pattern. or to castings made from a specific pattern PRODUCT OF METALS CHARGED INTO FURNACE Good Castings: The weight of the good castings produced is obtained by adding to the weight of the castings shipped during the month the weight of the castings on hand at the close of the month, and deducting therefrom the weight of the castings on hand at the beginning of the month. If this method is followed, inventories should be obtained by weight or count, and should not be blanket estimated. 3 3 nm 5 » > 0 © dn om Lt a > <Q jlo) = 3 2 N 2 “~ 2] ~ bo) od > ~ Q © E Defective Castings: The weight of the defective castings is obtained from the defective casting reports and it repre- sents the castings scrapped in the foundry. It should not include defective castings returned to the foundry by customers, as such losses are included separately in General Overhead Expense. This item does not include the heads and gates on defective castings. Slagged Castings: The weight of the castings slagged at the end of heats, is also obtained from the defective cast- ing reports. Heads and Gates: The weight of the heads and gates is obtained by actual weights wherever practicable, When it is not practicable to weigh heads and gates, their weight is obtained by deducting from the total furnace charge the sum of the weights of the good castings, the defective cast- ings, the slagged castings, the metal losses, and the melting and foundry loss. This item includes the heads and gates on defective castings. Metal Losses: This item includes steel poured from the furnace that is later recovered as scrap in the form of lost heats, spills, skulls, runner cup scrap, fins, steel poured ‘into pigs, and other scrap that is recovered. Experience has demonstrated that this metal loss is usually 3 percent to 5 percent of the total metal charged into the furnaces. I'otal Scrap: This item is the sum of the weights of the defective castings, slagged castings, heads and gates and metal losses. The weight of the total scrap produced during the month is a Py quantity as it is obtained by adding to the weight of “Own Scrap” char ged into the fur nace during the month, the weight of “Own Scrap” on hand at the end ‘of the month. and