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.