Part Process Chart Costing Sheet - Industrial Engineering Cost Measurement Sheet

Industrial engineers are engaged in productivity improvement of resources used in production (or other engineering processes). They reduce resource consumption in various operations of the processes and thus reduce the cost. To help them in cost reduction, industrial engineers have to prepare process chart costing sheets. The sheets utilize job costing system in case of discrete production systems.

Job Costing System

In this system of costing, the cost object is an individual unit of product or service, part,  batch, or lot.  A classic example is an order based job made for a specific customer. Hence the name job costing.

Relevant Cost Concepts

Cost object
Direct cost of a cost object
Indirect cost of a cost object

Cost pool:  Cost pool is grouping of individual cost items. It can be very broad comprising of hundreds of cost items. Or it can be narrow having only two items

Cost-allocation base: Cost allocation bases are used to link an indirect cost pool to a cost object. Usually cost drivers are used as cost allocation bases. Horngren gave the example automobile operating cost of an organization. The cost driver is number of miles traveled. Number of miles traveled is used as a cost allocation base. Different jobs are charged for automobile cost on the basis of number of miles traveled by the persons of the organization in producing and delivering the job.

Relevant Costing Concepts

Actual Costing:  Actual costing is costing method that traces direct costs to a cost object by using actual direct-cost rate of cost item times the actual quantity of the direct-cost input (item) and allocates indirect costs based on the actual indirect-cost rate (rates in case multiple indirect cost pools are there) times the actual quantity of the cost-allocation base (appropriate base when multiple cost pools are used).

Normal Costing: In this method of costing, direct costs are traced to cost object in the same manner as in actual costing. But indirect costs are allocated on the basis of budgeted indirect-cost rate and the actual cost quantity of cost allocation base.

Source Documents in Job Costing

An accountant in financial accounting system makes entries on the basis of some source documents and journal and ledger are the main registers for accounting entries.

Similarly cost accounting is also based on source documents and records.  A key document or record or account in cost accounting is job cost record (or job cost sheet). It records and accumulates all the costs assigned to a specific job as resources were consumed in producing the goods and services specified in the job. Hence, the job cost record is started as soon as the work begins on a particular job.

Each entry in a job cost record is based on a source document.

Materials from the store are ordered by the manufacturing engineers using a materials requisition record. This form is the source document for charging job cost records and department for the cost of direct materials used on a specific job.

For recording direct labor related costs in job cost record, labor-time record is the source document.  Each employees of the organization can have a labor time record and the time that he spends on various jobs is recorded on a daily basis on this record.  The cost per hour of each employee is determined and accordingly labor cost is recorded in job cost records. 

The indirect cost items are given standing order numbers and standing order cost records are maintained for them. Based on materials requisition records and labor-time records costs are charged to standing order cost records.

Special attention needs to be paid to the accuracy of the source documents as the accuracy of job cost records depends on the reliability of inputs.

Seven Step Procedure of Job Costing

Step 1: Identify the chosen cost object. The specific jobs for which job cost is to be ascertained is to uniquely identified and a job cost record is to be opened for each job.

Step 2: Identify the direct costs of the job: The job number is to be mentioned in the material requisition record and labor-time records. From these source documents, the job cost records are to be posted or charged with direct costs.

Step 3: Select the cost allocation bases to use for allocating indirect costs to the job.

Step 4: Identify the indirect costs associated with each cost allocation base.

Step 5: Compute the rate per unit of each cost-allocation base.

Step 6: Compute the indirect costs allocated to the job.

Step 7: Compute the total cost of the job by adding all direct and indirect costs.

Journal and Ledger Entries in Cost Accounting

Like in financial accounting, in cost accounting also journal and ledger are maintained.
Job costing system has a separate job cost record for each job and entries are made in it for each cost item charged to it. A summary of the job cost record is posted in a subsidiary ledger. In the general ledger, Work-in-Process Control Account is there and it presents the totals of the separate job cost records pertaining to all unfinished jobs.

A general ledger account with control in their name or title signifies or indicates that they are supported by underlying subsidiary ledgers that have additional details. Materials Control Account and Accounts Payable Control Account are additional examples of control accounts. Material Control Account has a subsidiary ledger – Stores Ledger that has detail on each type of material stored and used in the company. Accounts Payable Control Account has a subsidiary ledger that has accounts of individual suppliers.

Horngren has given examples of transactions to illustrate the use of journal entries in cost accounting.

1. Purchases of materials on credit $89,000

Materials Control A/c Dr.   $89,000
 To Accounts Payable Control     $89,000
2. Materials issued to manufacturing departments: direct materials: $81,000, and indirect materials $4,000
Work-in Process Control A/c   Dr.   $81,000
Manufacturing Overhead Control A/c  Dr.         4,000
 To Materials Control      $85,000

3. Total manufacturing payroll or salaries and wages: Direct $39,000 and indirect, $15,000
Work-in Process Control A/c   Dr.   $39,000
Manufacturing Overhead Control A/c  Dr.       15,000
 To Materials Control      $54,000

Summary

The important points to be remembered from this chapter or topic are the method of arriving at job cost and method of arriving at indirect cost of a job. There are source documents and from these source documents job cost record is prepared and this record will show the cost of a job. Journal and ledger are kept and the ledger will show the value of inventory in the form of material, work-in process and finished goods.

Costing Process Charts

We can take the  process described in a process chart for a discrete industry product as the cost object and determine the final cost of the product and also provide the cost of various components that go into the product. We can do cost measurements for various elemental inputs that go into each part and into the assembly operations. Such measurements will guide process cost analysis to reduce the cost of the whole process by reducing the cost at element level, part level and operation level as feasible.

Process charts can be operation process charts of flow process charts. Operation process charts contain only material transformation operations and inspection operations. Hence the operation chart costing will show the cost spent for material transformation and inspection operations.

Flow process chart will also depict material transport cost between machines and departments, warehousing costs and cost of delays. Hence costing of flow process chart will provide the total cost of tranferring a finish item to the store for either despatch or for further internal processing.

Industrial Engineers!  How will you collect data for this?

Supply Chain Industrial Engineering - Elon Musk - Idiot Index of Purchasing - Cost Reduction through Industrial Engineering Initiatives

https://nraoiekc.blogspot.com/2026/10/supply-chain-industrial-engineering.html

References

Horngren, Charles T., George Foster, and Srikant Datar, Cost Accounting: Managerial Emphasis, Tenth Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey, USA, 2000

Cost Accounting - Horngren et al., Book Information and Review

ud. 19.10.2026

Pub. 15.12.2022

Cost Measurement - Essential Activity of Industrial Engineering

Lesson of IE Online Course - Industrial Engineering Measurements - Online Course Module

Time Measurement,  Cost Measurement,   Productivity Measurement, Waste Measurement
Lesson 272 of IEKC Industrial Engineering ONLINE Course Notes. 

Cost measurement Principle of Industrial Engineering.

The ultimate proof of productivity improvement is the reduced unit cost reflected in the reported unit cost of products. Cost accounting is a well-developed independent area now with statutory bodies in many countries. Industrial engineers have to work in cooperation with them to get the representative cost figures that are reliable for using them for furhte cost reduction studies.

They have to get unit cost figures measured after IE changes and confirm the benefit of their IE projects.

https://nraoiekc.blogspot.com/2017/06/cost-measurement-principle-of.html

Cost Measurement and Analysis-A Necessary Part of Industrial Engineering Education & Training

Balbinder S. Deo and Doug Strong
Balbinder S. Deo, Assistant Professor, Department of Finance & Management Science,
College of Commerce, University of Saskatchewan, 25 Campus Drive, Saskatoon, SK,
Canada S7N 5A7.
Doug Strong, Professor in the Department of Industrial Engineering, University of Manitoba,
Winnipeg, Manitoba, Canada R3T 5V6.

Some Important Points made in the paper.

One of the basic duties of Industrial Engineering professionals is to make improvements in operations, and systems of operations, to reduce the cost of operations.

The concern for management and productivity issues  occupied the attention of the first ASME  president. Thus ASME's attention to the topic is there right from its founding . In fact, R.H. Thurston  the first ASME president, in his inaugural address (1880), included productivity improvement  and  cost reduction among the objects of the society in his inaugural address. 

"We are now called upon to do our part in the work so well begun by our predecessors, and so splendidly carried on by our older colleagues during the past generation. We have for our work the cheapening and improvement of all textile fabrics, the perfecting of metallurgical processes, the introduction of the electric light, the increase of facilities for rapid and cheap transportation, the invention of new and more efficient forms of steam and gas engines, of means for relieving woman from drudgery, and for shortening the hours of labor for hard-working men, the increase in the productive power of all mechanical devices, aiding in the great task of recording and disseminating useful knowledge; and ours is the duty to discover facts and to deduce laws bearing upon every application of mechanical science and art in field, workshop, school, or household."  - Thuston. R. H. Thurston. President's inaugural address. Transactions ASME, 1, 1880, pp. 14-29.

In industrial engineering, the measurement of time (Time Study and Work Measurement) became more popular and cost measurement was left to accounting profession even though many engineering managers made presentations on cost systems in ASME conferences. Two assumptions play a major role in promoting the use of physical measures of productivity in industrial engineering profession.


1. There exists an inverse relationship between physical measures of productivity and cost.
2. Increasing the physical productivity of resources used in production operations can reduce the cost of production of a manufactured product or service.

These relationships may hold true provided reduction in the physical quantity of one resource in one operation does not increase the consumption of other resources in the same operation and / or in other operations of the production system. Gain in the physical productivity of one resource may cause loss in others. For example, increase in the productivity of labor by employing high production capacity machines may cause loss in the productivity of machinery employed or vice versa. In a similar fashion, within a production system, gain in physical productivity measure of one functional area may cause loss in productivity of other related functional areas.

Improvement in productivity at the firm level, not just at the functional level, can be helpful in reducing the cost of production.

Cost Measurement in Mechanical Engineering Profession (ASME) - An Historical Perspective

Increasing sales and reducing cost of production by productive use of resources in operations can achieve increase in profit. The use of cost as a measure of productivity is not new among engineering professionals. Literature describing the history of engineering provides significant evidence of its use and promotion among engineers by the pioneers of the profession.

Henry C. Metcalf (1885), as a superintendent of ordnance depots,  realized the importance of cost measurement and analysis in manufacturing.   He proposed to measure costs to the minutest detail possible within the organization to measure the efficiency of manufacturing and administration operations and also to create plan of cost of operations by knowing the detailed elements of cost involved for each operation performed on a product during manufacturing process. He published his thoughts in a book titled “The Cost of Manufactures and the administration of Workshops, Public and Private” in 1885, for providing guidance to other engineering professionals in the field.

Henry Towne (1886), another engineering professional, wrote a paper titled ‘Engineer as an Economist’ for one of the meetings of The American Society of Mechanical Engineers. According to him, determination of cost was one of the important duties of an engineer. To achieve this end he proposed the establishment of a separate shop accounting section at each workshop level to collect cost related information to meet the cost information needs of engineering professionals.

Hugo Diemer (1910), is the first faculty member  of Industrial Engineering subject at Pennsylvania State College, quoted F.W. Taylor's  appeal to engineering professionals to take up the responsibility of cost related data collection and analysis as part of profession.

Charles Buxton Going  published a book titled, "Principles of Industrial Engineering" in 1911. He called industrial engineering, “New branch of engineering grown out of the rise of, and enormous expansion of the manufacturing system.” This branch of engineering, according to him, “Has drawn upon mechanical engineering, economics, sociology, psychology, philosophy and accountancy to form a distinct body of science of its own”. In this definition of industrial engineering, inclusion of the subjects of economics and accountancy testify to the fact that the cost measurement and analysis was regarded as part of industrial engineering theory and practice at that time.

Howell, in his presentation at the 1995 International Industrial Engineering Conference, advised industrial engineers to reclaim their traditional industrial engineering responsibilities, such as, measurements of labor costs, manufacturing methods, and productivity improvement, along with other responsibilities so that their demand in industry, job title and functional identity remains intact. According to him, cost estimation should be one of the areas for which an industrial engineer should also be responsible and accountable.

Recent Developments

Recent studies by Barnes (1991), Dhavale (1992), and Eaglesham (1998), found in the Industrial Engineering literature on Activity Based Costing technique, broadly point out that some industrial engineers take interest in cost measurement.

Lenz and Neitzel (1995)  developed their own methodology to develop a cost simulation model. In this model, they have used a cost equation that consists of eight components, such as station cost; labor cost; overhead cost; inventory cost; automation cost; capacity cost; material cost; and indirect cost. In this type of modeling, they claimed, all performance measures can be translated into costs by applying cost equations to the results of factory model.

Deo (2001) developed an Operation Based Costing model to measure cost of each resource in each operation, and the cost of each operation in a production system. In this model, an operation is considered as the basic unit of production system. The structure of the model matches the typical structure of an operation.

It is observed by the authors  that cost measurement and analysis is slowly becoming one of the basic requirements for various job openings related to industrial and manufacturing engineering area. Education and training of industrial engineers in cost measurement and analysis, can give them an extra advantage in raising productivity and reducing cost in industrial organizations. Industrial engineering schools and departments need to introduce the subject as a necessary part of industrial engineering education and training for future generation of industrial engineers.

Role of Costing and Cost Accounting in the Organization

Cost accounting is a separate accounting discipline and in many countries, statutory cost accounting bodies exist that regulate this field. Industrial engineers have to work in close cooperation with this discipline to make sure that costs are measured with a view to providing appropriate cost information to industrial engineering department and to the company regarding unit costs of components and finished products made by the company. The output of the industrial engineering department has to be captured by the cost figures reported by the cost accounting department.

Purposes of Accounting Systems

Accounting is a major means of helping managers of an organization, equity investors of an organization, potential equity investors, creditors and bond holders of an organization, potential creditors and bond holders of an organization, suppliers and customers of an organization and other stake holders to take decisions.

Accounting provides information for three major purposes:

1. External reporting: These reports are used investors, creditors, government authorities, and other outside parties.

2. Routine internal reporting: These reports which are periodically generated are used by managers of the company for their internal decisions.

3. Nonroutine internal reporting: This information or reports are generated to support projects and other decisions that come up as the need arises from them.

While the reports are prepared in different formats and basic data is manipulated or summarized in various ways to facilitate decision making, there is one data base maintained by the accounting system that contains data in the form debits and credits to various accounts maintained in the accounting system. Accountants combine these data items in various ways to provide information to internal or external users.

Distinction Between Financial Accounting, Cost Accounting and Management Accounting

Horngren’s distinction between them is interesting.

Management accounting as a discipline focuses on accounting information that facilitates decision making by managers of the organization. If focuses on routine and nonroutine accounting reports.

Financial accounting measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP). Executive compensation is tied to profit figures reported in the financial statements and equity share valuation is also based to a large extent on these financial statements.

Cost accounting provides information to facilitate both management accounting and financial accounting. Its focus is measuring and reporting financial and nonfinancial information that is related to the cost of acquiring or consuming resources by an organization.

Cost Management

Cost management is an activity of managers related to planning and control of costs. Managers have to take decisions regarding use of materials, processes, product designs and have to plan costs or expenses to support the operating plan for their department or section. All these activities come under cost management. Information from accounting systems help managers in cost management activities. But the cost accounting system and the reports it generates is not the cost management system. Accounting system can be interpreted as a part of cost management system of an organization.

Cost management is not cost reduction alone. It is much broader. Organization increase advertising expenditure to increase sales, increase research and development expenditures to promote new products. Here the concerned managers are deliberately incurring additional costs in a period (compared to the previous period) as they expect profits from such decisions or expenditures. Cost management system has to ensure that a cost is incurred with the expectation of profit.

The Role of Management Accounting

The role of management accounting is also described as problem solving, score keeping and attention directing.

Problem solving: The role of accounting in problem solving is to provide information useful in evaluating alternatives.

Scorekeeping: Scorekeeping records the results of various actions of the managers and helps in assessing whether the results expected from the various actions are realized or not.

Attention directing: The scorekeeping function in combination with expected results, and comparative analysis of scores of various companies, divisions and departments, comparative analysis of present period scores or results with previous periods show opportunities of focusing attention of managers to improve things.

Value Chain
Value chain is a visualization of complete business as a sequence of activities in which usefulness is added to the products or services produced and sold by an organization. Management accountants provide decision support for managers in each activity of value chain.

Design of Management Accounting System

The design of management accounting system has to take into consideration the decision needs of the managers. Also it has to take into consideration the new themes and challenges that managers face currently.

Horngren identified four such themes in the tenth edition of his book.

1. Customer focus: The challenge for managers it invest sufficient resources to enhance customer satisfaction. But every action of the organization has to result enhanced profitability or maintained profitability for the organization.

2. Key Success Factors: These are nonfinancial factors which have an effect on the economic viability of the organization.

Cost, quality, time and innovation are important key success factors. Management accounting systems need to have provisions for tracking the performance of the organization and its divisions as well as competitors on these success factors.

3. Continuous improvement: Continuous improvement or kaizen is a popular theme. Innovation related to this area in costing is kaizen costing .

4. Value Chain and Supply Chain Analysis: Value chain as a strategic framework for analysis of competitive advantage was promoted by Michael Porter. Management accountants have to become familiar with the framework and provide information to implement the framework by strategic planners.
The term supply chain describes the flow of goods, services and information from cradle (the mines sources of raw materials) to grave (where discarded products or dumped), regardless of whether those activities occur in the same organization or many organizations.

Key Guidelines for Management Accounting System Design

Cost Benefit Approach: In the system design resource allocation decisions are to be made. Examples would be software to buy and associates to employ. A cost-benefit approach should be used for all such decisions. Resources should be spent only when there is profit to the organization due to that expenditure. Each incremental addition to the accounting system must be supported by incremental profit to the organization.

Behavioral and Technical Considerations: Management has human dimension and it has to focus on how to help individuals to do their jobs better. Managing people involves discussion of managers with his associates on improving performance. The behavioral responses of people to reports highlighting their underperformance have to be understood. Management accounting should lead to cordial relations and climate.

Different Costs for Different Purposes: It is to be noted that there are several cost concepts and cost measures can be created for each of these concepts. Cost accountants have to careful to provide appropriate cost to the managers. The accounting system has to have some precautions to make sure that the accountant understands the decision situation of a manager and provides appropriate cost measures.

References

Horngren, Charles T., George Foster, and Srikant Datar, Cost Accounting: Managerial Emphasis, Tenth Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey, USA, 2000

Cost Accounting - Horngren et al., Book Information and Review


A Member of Taylor Society: H. K. Hathaway on Product Costing: Relevant Issues of Contemporary Concern
http://www.accountingin.com/accounting-historians-journal/volume-16-number-1/h-k-hathaway-on-product-costing-relevant-issues-of-contemporary-concern/

Lessons

273. Basics of Accounting for Industrial Engineers

https://nraoiekc.blogspot.com/2022/01/basics-of-accounting-for-industrial.html

274.  Cost Accounting - Introduction

http://nraomtr.blogspot.com/2012/01/cost-accounting-introduction.html

Cost measurement is not sufficient. Cost management has to be there to be there to plan & control costs and to do cost reduction systematically in every period.

Cost Management Teams - Cross-functional Cost Management for Each Cost Center

https://nraoiekc.blogspot.com/2025/12/cost-management-teams-cross-functional.html

Updated on 16.12.2025,  15.12.2024,  2.1.2022,  4 July 2019, 13 April 2017

Standard Costing and Cost Reduction

Lesson 279 of IEKC Industrial Engineering ONLINE Course Notes.

Lesson of  Industrial Engineering Measurements - Online Course Module

Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead. Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product. 

Manufacturers pay the actual costs during transactions. As a result there can be differences between the actual costs and the standard costs. The  differences are calculated and are known as variances. Standard costing and the related variances is a valuable management tool for control purpose. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs that warrant careful attention. 

Objectives of Standard Cost Development 

a) Establishing budgets;

b) Controlling costs and motivating and measuring efficiencies;

c) Promoting possible cost reduction;

d) Simplifying costing procedures and expediting cost reports; and

e) Assigning costs to materials, work in process, and finished goods inventories

Regarding Standard Setting  

The cost standard chosen should reflect the organization's objectives for using that cost standard and the variances that result from implementing it. 

There are number of prerequisites for setting up standard costing via setting standards across different cost categories. These prerequisites may be pointed as below:

a) Define bills of material parameters;

b) Define resources;

c) Define the cost centre;

d) Assign resources to cost centre;

e) Define overheads and assign to cost centre;

f) Review routing and bill structures to confirm that costs will roll-up properly;

g) Control overheads by resource;

h) Confirm that the WIP parameters, Recognize Period Variance and Require Scrap 

Account are set as required; and

i) Confirm that the Work in Process accounting classes and their valuations and accounts are properly set up.

It is very technical to set the standard materials quantity. How much unit of input materials and how many types of input materials is required for one unit of output is generally set out by the Product Development (PD) or Research & Development (R&D) or such technical department of an entity. They prepare a Bills of Material (BOM) or Recipe or formula of a product. The person (generally from Costing Department) assigned for calculating the unit standard cost of a product will collect the BOM or Recipe or formula and perform general review of the same, can be checked with previous trend to ensure the BOM or recipe is updated. 

Special care should be given while setting the standard for material price. Generally, the price of any existing material can be collected from the historical information from the purchase department and then an average standard can be determined. In the case of new item, price can be collected through market survey, from the suppliers or indenters. For imported material, it is desirable to consider the variance resulting from exchange rate changes. The person assigned for setting the standard cost should collect this information and apply his professional judgment to ensure the accuracy of the cost price. 

Setting the standard labor hour demands some technicalities. How much standard hour of labor is required for each unit/batch of production is usually fixed up by the production department. Time and motion study is a good tool to find out the standard labor hour. Time card and such other documents can be used to generate the data. Historical labor hour can also be considered to set the standard hour required for each unit/batch of output. Standard can be set for skilled, semi skilled and other categories of labor. 

Special care should be given while setting the standard labor rate due to the involvement of human factor in it. The standard hourly labor rate can be set from the previous information of the Human Resources Department. Labor rate can be segregated as skilled, semi skilled and other categories. In the case of hourly standard rate, inflationary adjustment and minimum wages requirements of the country, if any should be considered. 

The overhead rate can be segregated into fixed and variable categories. Activity based costing can be used for setting the standard. Historical information works as one of the base for setting such standard. Overhead rate can be applied either on the basis of direct labor hour or machine hour depending on the relevance or cause-effect analysis. 

Perform cost rollup as appropriate to set initial standard costs. With the initial cost rollup/update, complete the setup of the manufacturing cost structure and begin normal processing, including purchase order receipts, material issues, job/schedule creation, shop floor moves, and so on. Later, analyze, report, and distribute costs through the period process. 

Similar to work in process costing, the cost rollup does not cost the routings assigned to phantom assemblies. The bill of material phantom determines how the component is treated. If one is rolling up the phantom assembly, the cost of the routing is included in this level cost of the assembly. But, for the parent assembly, when the subassembly's supply type is Phantom, the routing costs from the lower level assembly are not included in the cost of the parent assembly. If one change the supply type and the subassembly is no longer a phantom, the parent assembly includes the lower level routing cost in the parent assembly's previous level costs. 

Perform a cost update for manufacturing costing after rolling up assemblies. This revalues inventory and implements new costs. 

A provision for normal loss (tolerable limit for variances) can be prescribed for guiding the variance analysis procedure to control any sort of undesirable outcome. 

Standard cost accounting can hurt managers, workers, and firms in several ways. For example, a policy decision to increase inventory can harm a manufacturing manager's performance evaluation. Increasing inventory requires increased production, which means that processes must operate at higher rates. When (not if) something goes wrong, the process takes longer and uses more than the standard labor time. The manager appears responsible for the excess, even though s/he has no control over the production requirement or the problem. Thus, it supplements the application of 'Management by Exception' principle.

Journal Entries

Variances should be journalized in such a way that they facilitate variance analysis for evaluation and control purpose. When accountants use a standard costing system to record transactions, companies are able to quickly identify variances. In addition, inventory and related cost of goods sold are valued using standard cost information, which simplifies the bookkeeping process. 

Two journal entries are needed to record transactions relating to direct materials that include these variances.  The entry to record the purchase of direct materials and related price variance is -

Raw Materials Inventory Dr.

Materials Price Variance (UNF) Dr.

 Trade Payables Cr. 

The raw materials inventory account contains the actual quantity of direct materials purchased at the standard price. Payable reflects the actual cost, and the materials price variance account shows the unfavorable variance. Unfavorable variances are recorded as debits and favorable variances are recorded as credits. Variance accounts are temporary accounts that are closed out at the end of the financial reporting period. 

The entry to record the use of direct materials in production and related quantity variance is Work in process Inventory Dr.

 Materials Quantity Variance Cr.

 Raw Materials Inventory Cr. 

Work-in-process inventory reflects the standard quantity of direct materials allowed at the standard price. The reduction in raw materials inventory reflects the actual quantity used at the standard price and the materials quantity variance account shows the favorable variance. 

Labor is not inventoried for later use like materials; thus, only one journal entry is needed to record transactions relating to direct labor. Again, many more journal entries would typically be made throughout the year for direct labor. For the purposes of this example, we will make one journal entry to summarize the activity for the year. The entry to record the cost of direct labor and related variances is - Work in process Inventory Dr.

Labor Rate Variance (UNF) Dr.

 Labor Efficiency Variance (F) Cr.

 Wages Payable Cr.

Work-in-process inventory reflects the standard hours of direct labor allowed at the standard rate. The labor rate and efficiency variances represent the difference between work-in-process inventory (at the standard cost) and actual costs recorded in wages payable. 

The entry to record actual overhead expenditures is -

Manufacturing Overhead Dr.

 Various Accounts Cr. 

The credit goes to several different accounts depending on the nature of the expenditure. For example, if the expenditure is for indirect materials, the credit goes to accounts payable. If the expenditure is for indirect labor, the credit goes to wages payable. 

Following entry will transfer manufacturing overhead to WIP Inventory - 

Work in process Inventory Dr.

 Manufacturing Overhead Cr. 

The following entry is made to transfer the costs out of work-in-process inventory and into finished goods inventory -

Finished Goods Inventory Dr.

 Work in process Inventory Cr. 

When finished product is sold, the following entry is made:

Costs of Goods Sold Dr.

 Finished Goods Inventory Cr. 

Note that the entry shown previously uses standard costs, which means the cost of goods sold is stated at standard cost until the next entry is made. 

Most commonly used method of disposal of variances is to adjust with the cost of goods sold. When accounts are closed out to cost of goods sold, after which point cost of goods sold will reflect actual manufacturing costs for the products sold during the period. The following entry is made to accomplish this goal:

Cost of Goods Sold Dr.

Materials Quantity Variance Dr.

Labor Efficiency Variance Dr.

 Material Price Variance Cr.

 Labor Rate Variance Cr. 

However, there is a "Variance proration" method of variance disposition which allows apportionment of all variances among Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. This accounting treatment reflects the impact of all unusual inefficiency or efficiency in all of the accounts through which the manufacturing cost flow. 

The following three steps should be incorporated into a company's inventory accounting processes to assist in managing its standard cost: a) Review the company's capitalizable costs: When setting standard costs, have all appropriately capitalizable costs been considered, such as incoming freight for procured inventories or overhead for produced inventories? For instance, freight is subject to potentially significant variations due to factors such as the carrier or the quantities being ordered. b) Update standard costs regularly: Updating standard costs on an annual basis is a good start but is probably not frequent enough to ensure accurate inventory costing (not to mention the potential effects on the company's income statement every time inventory is expensed inaccurately). If the cost of procuring or producing a product has changed since the standard cost was last modified, inventory will be misstated accordingly. c) Maintain a "standard-to-actual" reserve in the balance sheet: Every time that any component of inventory is acquired or produced at a cost different than the assigned standard cost, that variance hits the income statement and inventory is misstated. If feasible, at the end of every reporting period an analysis of purchase and production costs for capitalizability should be performed. When complete, capitalizable variances should be recorded in a "standard-to-actual" reserve within inventory on the balance sheet with the remainder being appropriately expensed through the income statement. This reserve has the effect of adjusting the company's inventory balances to "actual," which is appropriate under accounting standard. 

Standard cost card is an important document which needs to be developed, maintained, reviewed and complied. 

Cost Reduction by Industrial Engineers

b) Update standard costs regularly: 

Updating standard costs on an annual basis is a good start but is probably not frequent enough to ensure accurate inventory costing (not to mention the potential effects on the company's income statement every time inventory is expensed inaccurately). If the cost of procuring or producing a product has changed since the standard cost was last modified, inventory will be misstated accordingly. 

Industrial engineers have the responsibility for cost reduction in the company. Whenever they conduct process improvement studies using process charts and operation analysis sheets, they have to set up new standards for material usage, machine usage, labor usage and expenses. These revised quantity standards are to be intimated to cost accounting departments to update standard cost cards at appropriate time. There is opportunity in accounting to report, deviations between old standard and new standard also for limited periods of time so that convergence of shop floor practices to new standard can be monitored.

Source:

BCAS 13: Standard Costing  (Bangladesh)

STANDARD COSTING AND SCIENTIFIC MANAGEMENT

Rosalie C. Hallbauer

The Accounting Historians Journal

Vol. 5, No. 2 (Fall 1978), pp. 37-49 (13 pages)

Published by: The Academy of Accounting Historians

ABSTRACT

Many have suggested that scientific management had a direct influence on the development of standard costing. This paper examines the relationship between these concepts in broad terms. While it is concluded that no direct relationship exists between scientific management and standard costing, the existence of an indirect relationship is acknowledged. Scientific management does not require any specific type of accounting system and standard costing does not require a certain type of management organization to operate. However, certain reports developed for the scientifically managed enterprise, when added to the germs of standard costing that existed, expedited the evolution of standard costing.

https://egrove.olemiss.edu/aah_journal/vol5/iss2/3/

Ud. 4.12.2025

Pub. 8.1.2022

Machine Cost and Work Measurement - Time and Cost Estimates for Metal Forming Processes

Cost estimation is important activity for industrial engineers. For making cash flow estimates for the cost reduction projects or productivity improvement projects, industrial engineers have to prepare cost estimates.

Cost Estimates to Guide Pre-selection of Processes

PDF by AMK Esawi · 2003

https://www.grantadesign.com/download/papers/university/gen6.pdf

Estimation of Forging Cost and Time

Material Estimation for the Forging

Expected Losses in Forging


The losses expected in forging are:

(i) Scale loss.
(ii) Flash loss.
(iii) Tonghold loss.
(iv) Sprue loss.
(v) Shear loss.


(i) Scale loss

When the material used in forging, iron is heated at a high temperature in atmospheric conditions a thin film of iron oxide is formed all round the surface of the heated metal.  The iron oxide film falls from the surface of the metal on being beaten up by the hammer. This is termed scale loss and it depends upon the surface area, heating time and the type of material. For forgings under 5 kg, the loss is 7.5 per cent of the net weight, and for forgings from 5 to 12.5 kg and over an addition of 6 per cent and 5 per cent of the net weight is expected as the scale loss.

(ii) Flash loss

This is a loss related to die forging or machine forging.

There is a certain quantity of metal which comes between the flat surfaces of the two dies after the die cavity has been filled in. This material equal to the area of the flat surface is a wastage. For finding the flash loss, the circumference is determined which multiplied by cross-sectional area of flash will give the volume of the flash. The volume multiplied by material density gives the flash loss. Generally, it is taken as 3 mm thick and 2 mm wide all round the circumference.

(iii) Tonghold loss

This is the loss of material due to a projection at one end of the forging to be used for holding it
with a pair of tongs and turning it round and round to give the required cross section in drop forging.
About 1.25 cm and 2.5 cm of the size of the bar is used for tonghold. The tonghold loss is equal to
the volume of the protections. For example, the tonghold volume loss for a bar of 2 cm diameter and tonghold length 2 cm will be  (π/4)*2(cube) =   1.25 cm(cube)


(iv) Sprue loss

The connection between the forging and tonghold is called the sprue or runner. The material loss
due to this portion of the metal used as a contact is called sprue loss. The sprue must be heavy
enough to permit lifting the workpiece out of the impression die without bending. The sprue loss is
generally 7.5 per cent of the net weight.



(v) Shear loss

In forging, the long bars or billets are cut into required length by means of a sawing machine.
The material consumed in the form of saw-dust or pieces of smaller dimensions left as defective
pieces is called shear loss. This is usually taken as 5% of the net weight.


Thus nearly 15 to 20% of the net weight of metal is lost during forging. The expected loss of material has to  be added to the net weight to get the gross weight of the material.


Forging Cost


The cost of a forged component consists of following elements:
(i) Cost of direct materials.
(ii) Cost of direct labour.
(iii) Direct expenses such as due to cost of die and cost of press.
(iv) Overheads.


(I) Direct material cost

Cost of direct materials used in the manufacture of a forged component are calculated by first determing the net weight based on component drawing and then adding expected losses.


(i) The net weight of forging

Net weight of the forged component is calculated from the drawings by first calculating the
volume and then multiplying it by the density of the metal used.
Net weight = Volume of forging × Density of metal.


(ii) Gross weight
Gross weight is the weight of forging stone required to make the forged component. Gross
weight is calculated by adding expected losses.

Gross weight = Net weight + Material loss in the process.

In case of smith or hand forging, only scale loss and shear loss are to be added to net weight but
in case of die forging other machine related losses are also to be taken into account. 

(iii) Diameter and length of stock
The greatest section of forging gives the diameter of stock to be used and
Length of stock = (Gross weight)/[ Sectional area of stock× Density of material]

(iv) The cost of direct metal is calculated by multiplying the gross weight by price of
the raw material
Direct material cost = Gross weight × Price/kg.


(II) Direct labour cost

Direct labour cost = t × l
Where t = Time for forging per piece (in hrs)
l = Labour rate per hour

No general formula is given in books for forging. It has to be estimated internally using time study data of the past.


(III) Direct expenses
Direct expenses include the expenditure incurred on dies and other equipment, cost of using
machines and any other items, which can be directly identified with a particular product.

The method of apportioning die cost and machine cost:


Apportioning of die cost Let cost of die = Rs. x
No. of components than can be produced using this die be  y components
Cost of die/component = Rs. x/y

Apportioning of machine (press) cost

Let cost of press = Rs. A
 Life of press be n years

 Life of press in hours = B =  n × 12 × 4 × 5 × 8 = 1920 n hours
(Assuming  12 months in a year, 4 weeks in a month, 5 days a week, 8 hours of working per day, 
Hourly machine price cost of production = A/B
No. of components produced per hour = N
Cost of using press per component = A/ (BN) Rs.

This excludes cost of power consumed and other consumables.


(IV) Overheads expenses

The overheads include supervisory charges, depreciation of plant and machinery, consumables,
power and lighting charges, office expenses etc. The overheads can be  expressed as percentage
of direct labour cost or machine hours.

The total cost of forging is calculated by adding the direct material cost, direct labour cost, direct
expenses and overhead.

Three hundred pieces of the bolt are to be made from 25 mm diameter rod. The head has to be 40 mm dia.  The length of the head is 22mm and the length of the remaining bolt is 113 mm. Find the
length of material required for forging by upsetting. What length of the rod is required if 4% of the length goes as scrap?


Volume of head of the bolt = (π/4)* D(square)* L

D = 40 mm
L = 22 mm
=  (π/4)* 40(square)*22  =   27,646 mm(cube)

Length of material required for making the head
= Volume/area of the blank  being used
In the problem the dia. of the blank used is 25 mm

Area =  (π/4)* 25(square)  =  490.6 mm

∴ Length of bar = 27,632/490.6 =  56.35 mm

Total length required for forming = 56.35 + 113 = 169.35 mm
Length of rod required for making 300 bolts = 169.35*300/1000     =   50.8 metre

Considering loss 4%,
Total length required = (50.8 + .4) × 50.8 = 71.12 metre

Productivity Science and Cost Drivers for Forging

https://www.forging.org/forging/design/331-materials-cost.html

https://www.forging.org/forging/design/332-tooling-costs.html

https://www.forging.org/forging/design/333-manufacturing-cost.html

Manufacturing Cost

Manufacturing cost includes the cost of labor plus the cost of purchasing, maintaining and operating the required machinery and material handling equipment (Machine cost + Labor cost). A portion of these costs is charged to each forging produced. In most cases it also includes the cost of maintaining and replacing the forging tools. Machinery typically includes saws, shears, furnaces, preforming equipment, the forging press or hammer with its associated controls and trim presses. Material handling equipment typically includes cranes, lift trucks, conveyors, etc.

Manufacturing cost of a job is driven by the number of operations required to produce the forging.

Each forging cost center is assigned an hourly operating cost, which is divided by the number of pieces produced per hour to arrive at the cost charged to the forging. 

When forging microalloyed steels, which are used to eliminate heat treating, the cost of using special cooling conveyors will be included in the cost of forging. The total manufacturing cost is the sum of the costs of the individual operations used to produce the forging (We can interpret it as a process of producing the forged component and operations involved in the process - operation process chart).

Design simplifications that reduce the number of operations, or reduce the size or complexity of the required forging machines drive toward minimum processing cost. For example, an impression die forging may require several preforming operations, a blocker operation, a finish operation and a trimming operation. The total processing cost is the sum of the costs for each operation. If the design can be modified to reduce the number of operations, processing cost is  reduced. 

Processing cost can be reduced by designing the forging to facilitate metal flow in the die and reduce forging pressures. This usually involves modifying sharp details to provide larger radii. In some cases it may be possible to use a smaller forging press with a lower hourly operating cost. It is also possible to use machines that produce more parts per hour. Lower forging pressures also tend to reduce tool maintenance and replacement cost, which reduces cost per piece.

More in:

https://www.forging.org/forging/design/3-design-and-development-products-made-forgings.html

A review of automation in manufacturing illustrated by a case study on mixed-mode hot forging

Colin S. Harrison

Manufacturing Rev. 2014, 1, 15

The key advantages:

Increased Volume (capacity).

Improved Quality – via consistency of manufacturing and reduction in variability.

Reduced Costs.

https://mfr.edp-open.org/articles/mfreview/full_html/2014/01/mfreview140010/mfreview140010.html

Drop Forging Cost Analysis and Quotes

https://www.dropforging.net/cost-analysis.html

Forging Press Selection And Tonnage Calculation

Stamping / 10 minutes of reading

https://www.machinemfg.com/forging-press-selection-and-tonnage-calculation/

Automatic Optimization

Optimization applied to a forging process aims at reducing production costs and improving the quality of the manufactured part.   FORGE® and COLDFORM® and SIMHEAT® softwares help in numerical simulation. 

WHAT IS AUTOMATIC OPTIMIZATION IN PROCESS SIMULATION?

‘Optimization’ or ‘optimizing’ means running a series of simulations to identify the ideal process conditions giving the best final result.

Optimization follows a number of set parameters:

 Objective: billet weight, die wear or die stress, tonnage, difference with experimental plots, etc. The objective can be to minimize or to maximize.

 Process conditions: billet size or position, lubricant, temperature, die geometry, etc.

Constraints to respect (additional mandatory condition): complete filling of the die cavity, no folds or laps, prescribed scalar value, prescribed force or torque value, etc.).

HOW DOES IT WORK?

Automatic Optimization is based on MAES methods (Metamodel-Assisted Evolution Strategies) proposed by Emmerich et al. It has shown its efficiency and robustness in several complex metal forming applications.

Each simulation uses a set of process parameters (diameter and length) and is referred to as an ‘individual’. Each ‘generation’ includes several individuals. Good individuals  match the objective and respect the constraints. Poor individuals  do not respect the constraints. The next generation is automatically based on the best current individuals. The algorithm loops until the given number of generations has been reached. At each generation, a new population of individuals is created. A cost-function is used to rank each individual and designate the ‘best candidate’.

Defining a Design of Experiment (DOE), the user indicates to the system a selection of values (process conditions) to be tested. Combining Automatic Optimization based on Metal Model Design with the DOE is a good technique to find the solution. 

https://www.transvalor.com/en/blog/automatic-optimization-of-forging-processes

The Activity-based Costing Approach for Estimation of Cost of a Forged Part`s  in FMS with A(2)-Degree Automation: A Case Study in a Forging Industry

K. Rezaie and B. Ostadi

Information Technology Journal

Year: 2006 | Volume: 5 | Issue: 3 | Page No.: 546-550

DOI: 10.3923/itj.2006.546.550

https://scialert.net/abstract/?doi=itj.2006.546.550

COMPUTERIZED COST ESTIMATION FOR FORGING - PDF

In this study, an interactive cost estimation software named “Forge Cost. Estimator”, which performs the early cost estimation for forgings, has been developed.

https://etd.lib.metu.edu.tr/upload/4/1060193/index.pdf

Estimation of Forging Die Wear and Cost  - THESIS  PDF

Knight‟s Cost Model. Knight developed a cost model to estimate die costs for hammer forging

https://etd.ohiolink.edu/apexprod/rws_etd/send_file/send?accession=osu1277993083&disposition=inline

Open Access

Published: 29 August 2020

An analytical cost estimation model for the design of axisymmetric components with open-die forging technology

Federico Campi, Marco Mandolini, Claudio Favi, Emanuele Checcacci & Michele Germani 

The International Journal of Advanced Manufacturing Technology volume 110, pages1869–1892 (2020)

Abstract

Open-die forging is a manufacturing process commonly used for realising simple shaped components with high mechanical performances and limited capability in terms of production volume. To date, an analytical model for estimating the costs of components manufactured with this technology is still an open issue. The paper aims to define an analytical model for cost estimation of axisymmetric components manufactured by open-die forging technology. The model is grounded on the analysis of geometrical features available at the design stage providing a detailed cost breakdown in relation to all the process phases and the raw material. The model allows predicting product cost, linking geometrical features and cost items, to carry out design-to-cost actions oriented to the reduction of manufacturing cost.

Cost model and related schemas for collecting equations and data are presented, including the approach for sizing the raw material and a set of rules for modelling the related cost. Finally, analytic equations for modelling the cost of the whole forging process (i.e. billet cutting, heating, pre-smoothing, smoothing, upsetting, max-shoulder cogging, necking and shoulders cogging) are reported. The cost model has been tested on eight cylindrical parts such as discs and shafts with different shapes, dimensions and materials. Two forge masters have been involved in the testing phase. The absolute average deviation between the actual and estimated costs is approximately 4% for raw material and 21% for the process. The absolute average deviation on the total cost (raw material and manufacturing process) is approximately 5%.

https://link.springer.com/article/10.1007/s00170-020-05948-w

Forging - Introduction Material

https://manufacturing-videos.blogspot.com/2019/08/forging-introduction.html

Action Item

Do cost estimates or standard cost calculation for all parts and assemblies. Remember the final goal of industrial engineering is cost reduction that benefits consumers, employees and shareholders/owners. 

Industrial Engineering - Bulletin Board - Industrial Engineering Knowledge Center.

https://nraoiekc.blogspot.com/2016/06/industrial-engineering-bulletin-board.html

Updated 20.12.2024,  12 Jan 2022, 21 May 2021

Pub 29 Nov 2019

Elements of Cost - Cost Accounting Record/Book Keeping

 

The elements of cost constitute the cost of manufacture of a product for accounting purpose. In cost accounting, three elements are used to categorize costs. These three elements are Material, Labour and Expenses.

The cost accounting processes are criticized by many management accounting scholars that they are designed primarily to provide information for financial accounting purposes. Management accounting is not given the required focus.

Industrial engineering discipline is not taking steps to make cost accounting provide information to serve their requirements. Industrial engineers departments have to ask for detailed recording of costs for each machine used in the organization. Industrial engineering is concerned with machine effort industrial engineering and human effort industrial engineering. Hence cost incurred for machines have to be treated as element of cost and detailed cost recording has to happen for each machine or at least for all important machines in the organization.

Accounting for materials

For each material that is brought to stores, there is an accounting ledger to which the material received is debited in money terms. When any material is issued to any shop on a material requisition, the value of the material issued is credited to the stores account and it is debited to the shop ledger account or job account/batch account or the process account concerned.

Accounting for Labor

The wages paid to the workmen in each shop are ascertained for the month and from this amount the labor hour rates are determined. This labor hour rate is charged to the jobs/batches or processes which used the labor. To facilitate the calculation of the amount on each job card, the time spent by various operators are recorded.

Accounting for Expenses

Expenses for payments made for services like electricity

The organization may install separate meters for each shop or department and through them know the amount spent by each department.

Material cost, Labor cost and expenses are further classified as direct and indirect costs.

Direct costs can be debited to the job costs directly whenever the expense is incurred. But indirect costs are incurred at the shop level and individual jobs cannot be identified at the time of issue or use. Hence some indirect methods are used to identify the costs incurred at the job level based on the total expense incurred in a month or a period.