COST ACCOUNTING

Evening Post, Volume CXXIV, Issue 15, 17 July 1937, Page 6

COST ACCOUNTING

ADDRESS TO STUDENTS

Various important aspects of theoretical and cost accounting in a factory were explained by Mr. J. B. Black in an address to the Wellington Accountant' Students' Society this week. "In drawing up a system of cost accounting fov any industry," he said, "it will oe found that there are certain definite underlying principles which must be followed. Any deviation from these fixed fundamentals will negative the efficiency, accuracy, and value of the system . and will lead to unprofitable trading." " . He made special reference to the inefficiency allowance," representing the amount by which actual practice fell short of the standards allowed for in the costings.1 "If you were to take eyery sales invoice in a financial period and enter against each item on each invoice the prime cost, that is, direct materials and direct labour as shown on the costing,'add them all up and deduct the total from the gross sales, you would have the theoretical gross profit which is the: gross profit you should have "made if you had been working to your costings," he said. "If you then compare this figure with the' actual gross profit as shown in' the financial accounts, you will find that the actual gross profit is very considerably less than the theoretical, or in other words, that a good proportion of your gross profit has been dissipated.

"Several items will occur not previously thought of, but even after these have been taken into consideration you will find that there still remains a substantial figure, which almost defies elucidation. This elusive remainder is fairly constant, period by period, and is probably a very accurate measure of your inefficiency in manufacturing and it is quite bad. "However bad and reprehensible it may be, if you want to see the net profit you. expect, you will have to make an allowance for it in costing, and show it as a percentage of total cost. For example, if the theoretical gross profit is £15,000, and the actual gross profit £13,000,- there is a difference of £2000 which, expressed as a percentage of the total cost of sales,' that is, sales less net profit say £50,000,-is 4 per cent. Thus 4 per cent, additional would need to be added to the total cost figure previously arrived at." • .