PRINCIPLES GOVERNING COST-TAKING IN MANUFACTURING INDUSTRIES
BOARD OF PLANNING
The draft principles governing cost-taking in manufacturing industries, recently made public by the Government, lay down the formula of estimating costs based upon the ordinances controlling and regulating commodity prices, corporation finance and accounting, and inspection of munition plants, which have been promulgated pursuant to the National General Mobilization Law. The operation of these new principles is not only effective in armament factories but also in industries in general, in order that all cost-taking may be standardized under a single unified system. The primary object for the adoption of these definite forms is to ascertain the accurate expenses incurred in all production plants so as to serve as the ground-work for determining the just and fair prices of articles and as a means of increasing the output—steps which are essential for the formation and smooth conduct of highly organized national defence economy.
For the successful prosecution of the price policy in wartime planned economy, it is particularly important to fix prices at their proper levels on the basis of an exact cost-taking either in the case where official prices are established or where the pool-price system is adopted. And this is significantly necessary in regard to the purchasing of war-supplies. Since, however, not all industries are in a position readily to furnish complete data required for such a method of cost-taking, there is no other alternative than to implement the formula worked out by the Government.
As has been mentioned, cost-taking is conducive to the increase of productive efficiency, which is the most essential factor relating to wartime planned economy. In this connection, it is important to note that an increase in out-turn skill means more than a corresponding rise in individual fitness; in fact, it denotes the growth of industrial efficiency. For this purpose too cost-taking is indispensable. Hence, the Government has drafted the principles of cost-taking to regulate manufacturing enterprises. These fundamentals
were originally framed by the Board of Planning along the lines suggested by the "General Rules of Cost-Taking in Manufacturing Industries," prepared by the Commission for Supervision of Control of Financial Affairs created within the Department of Commerce and Industry, and by similar innovations incorporated by the Army and Navy. The entire scheme was subjected to further studies in the light of actual experiences gained by the two services as well as by business interests, and finally approved in the present shape, in July, by an expert committee of the Board of Planning.
The principles delineate the general rules of assessing costs and important details for practical application in accordance with the category and scale of industries now under preparation. Moreover, cost-taking to be of value must be precise and should be of norm easily accessible to comparative study. For this reason, it is required that, under the new provisions, it be made uniform vis-à-vis the category and scope of industries. Again, under these regulations, the cost means the actual defrayment substantiable by books and other documentary evidences, while calculation by estimates may be permissible for handiness in reckoning cost factors or in allocating indirect expenses.
The salient points of the principles concern the accounting of cost factors and of outlays of different departments of enterprises, and the distribution of the cost mainly on manufactures, in addition to measures patterned for facilitating accounting and book-keeping.
With regard to the accounting of cost factors, rules are given outlining (1) the scope of the cost, or in other words, as to which expenses may be, or may not be recognized as expenditures, (2) the classification of factors of the cost, and (3) the methods of calculating the various factors of the cost.
The scope of the cost is indicated by prescribing and enumerating the items having no relation whatsoever with cost-making, with activities of production or with the mode of delivery of goods which form the subject matter of an enterprise, and expenses incidental in nature and as such to be shown as losses, as well as expenses, which, though making up the cost, are for the sake of convenience included in the profit schedule.
The outlay is divided into two main heads: (1) manufacturing cost, including expenditures for materials, service and labour, and miscellaneous expenses, and (2) the cost for general management,
comprising salaries, wages, and welfare disbursements, and the marketing cost.
As for the technique of finding out cost, the volume and price of consumption of the cost factors should, as has already been pointed out, be tabled as they actually stand, and the methods of their calculation are fixed for each case. For instance, the cost of materials should be figured out in the manner described in the sections entitled "Calculation of the Volume of Consumption of Materials," and "Calculation of the Consumption Price of Materials." Similarly, the procedure of calculating the cost of labour and service is set forth in the section called "Calculation of Consumption Wages."
In respect of expenditures, the writing-off of assets in particular, two methods of tabulation are recognized; namely, (a) the writing-off of a stated amount and (b) that at a specified rate. According to the former, deduction is made of the existing value, say of the equipment, from the cost and, then, the remaining value is divided by the number of years of its use. The result obtained is the amount to be written off each year. This method has the merit of being simple besides being relatively fair, and is on that score acknowledged as the regular orderly arrangement. According to the latter method, the amount to be cancelled for the first year is obtained by multiplying the cost by the stated rate, and that for the second year by multiplying the cost as written off in the preceding year by the same rate, and so on.
Another feature of the new system is that it gives prominence to the accounting of departmental expenses with a view to ensuring correctness in cost-taking and in augmenting business efficiency by making clear the responsibilities of those having charge of each department. Rules are prescribed for the creation of departments, the charging to each department of the cost factors, and the allotment of auxiliary departmental expenses to the manufacturing department.
As for the parcelling out of the incidence of the cost to manufactures, rules relating thereto are to be found in the chapter dealing with the methods of cost-taking, but, for the estimating of the cost in its manifold aspects, there are two separate provisions in terms of the processes of production, namely, the individual cost-taking, and the comprehensive cost-taking. The latter method is sub-divided
into simple comprehensive cost-taking, comprehensive cost-taking by processes of manufacture and comprehensive cost-taking by categories of goods, rules being laid down for each of the different classifications.
In the individual cost-taking, the production is classified and controlled according to the specifications, and the collective computation of amounts of consumption for the cost factors is made for each specification. This is particularly suited for dealing with industries turning out articles of great varieties, differing in types and standards, such as, the manufacture of machine tools.
The comprehensive cost-taking, on the other hand, computes the aggregate expenses for a given period extensively and divides into units the manufactures to verify the unit cost. This style of accounting is used in the case of mass production in which articles of the same kind are turned out in great numbers and in quick succession. The simple process comprehensive cost-taking is practised in industries producing supplies of the same kind in rotation by means of simple techniques, and the total manufacturing expenses for a definite period of accounting are worked out comprehensively, while the comprehensive cost-taking by manufacturing processes is applied to cases where production is carried on in several distinct stages or in different manufacturing departments. In such cases, the total defrayal for production is calculated by different treatments so as to find out the comprehensive cost for each process for a particular period. This method of cost-taking may profitably be used for the iron and steel works, petroleum refining, pottery, sugar refining, spinning and textile, and paper manufacturing.
The comprehensive cost-taking by categories of goods is employed where the form of production is such that manufactures of profuse varieties are released in succession through an operative chain. The specification is issued for each category of goods, on the basis of which the comprehensive cost-taking may be made for each category by the different stages of processing. This will give the cost of the manufactures by categories, and this method will be applicable to industries like the iron and steel, woolen and automobile.
The foregoing comprises the main points of the rules prescribed in the Principles Governing Cost-Taking for Manufacturing Industries. Since these rules are of a general character, they will have to be put into force in a manner conformable to the category, scale,
and form of production of diverse industries.
As the title indicates, the present draft principles of cost-taking govern manufacturing industries only; but they will be extended to cost-taking for the mining industry and general commercial enterprises.