An accounting system for mechanical and motorized equipment

A. R. PATTERSON

Woodlands Department, Canadian International Paper Company

RAPID strides have been made in recent years in the development and improvement of mechanical and motorized equipment, and industry has quickly seized the opportunity of putting to use such equipment as appeared to be advantageous. The application of mechanical and motorized equipment to industry has made necessary the development of an accurate cost accounting system, which will provide management with the pertinent information required for the exercise of adequate cost control. This need is based on the theory that the ultimate aim of cost accounting is not merely to determine the cost of producing the end product, but also to determine as accurately as possible, the cost of each and every item entering into the final cost. The knowledge of what it costs to produce the end product without using that knowledge to reduce or control production costs not only deprives a cost system of its main purpose - cost control and cost reduction - but leaves little, if any, justification for its existence.

The system described here was designed to provide management with information to exercise such cost control.

Recognition is given to the fact that operating costs of any nature, including accounting, must be kept to a minimum; therefore, absolute accuracy is sacrificed in some cases in the interest of economy. However, accuracy to a practical degree is a necessity in keeping with the principle that the best system of cost accounting is that which gives the most accurate results with the least clerical work.

The first and most important point to be recognized is that the success or failure of any accounting system is the degree to which management is prepared to accept their responsibilities by providing the wherewithal to form the required organization, secure qualified personnel and by supporting the policies and procedures established in connection therewith.

It is assumed that, for the purpose of this paper, the system has the support of management and that the business is not of sufficient size to warrant any major changes in the organization as regards accounting records and personnel. It is also assumed that only a few items of equipment are involved and that it is concentrated in one location, thereby eliminating to a great extent the necessity of general ledger control accounts and auxiliary ledgers.

General ledger

The property, operating cost and income accounts may be set up in the general ledger as follows:

Mechanical and motorized equipment. Separate accounts may be opened to cover each piece of equipment, but it is suggested that one account be all-inclusive to serve as a control account supported by equipment records, which will be discussed below. It is to be debited with the cost value of equipment purchased and credited with depreciation, sales, trade-in allowances, etc. Depreciation is to be set up on the basis of general accounting practice without regard to the relationship it has to actual operating cost. The end profit or loss, with respect to each item of equipment developing through sales, trade-ins, etc., is to be adjusted to equipment operating costs.

Equipment operating cost. Separate accounts are recommended to cover the operating costs of each individual piece of equipment. Ledger sheets are to be designed so as to provide sufficient columns to record each cost classification. It is to be debited with all operating cost items originating through payrolls, stores and other charges, such as licenses, garage accounts, insurance, depreciation and etc. It is closed, in conjunction with the corresponding income account, to a general overhead account when closing the books.

Equipment income account. Separate accounts appear desirable (at least, for this purpose) to cover the earned income accruing through the application of a tariff or fixed rate to the operating medium developed from auxiliary records. It is closed, in conjunction with the corresponding operating cost account, to a general overhead account when closing the books.

The tariff or fixed rate is established on the basis of estimated costs per mile or hour depending upon the nature of the equipment involved and costs desired. Rates are established as follows:

Estimated Costs per Hour
	$
Fuel	0.90
Lubrificating oils and greases	0.05
Tires	0.20
Repairs	0.66
Accessories	0.02
Registration ($ 150. x 1,600 hours)	0.10
Insurance ($76. x 1,500 hours)	0.05
Write-off ($4,500 x 4,500 hours)	1.00
TOTAL	2.97

The above estimate was developed on a machine assumed to cost $6,000 with a salvage value of $500. The annual operating time is estimated at 1,500 hours and the life expectancy at 4,5(10 hours. Rates are established in a similar manner in connection with all mechanical and motorized equipment.

Equipment record

It is assumed that the suggestion concerning the account, mechanical and motorized equipment. has been adopted and that equipment records are necessary. The " button and string " type of envelope is recommended for this purpose primarily because it provides a pocket in which to insert any pertinent information concerning the machine, such as, copy of the purchase invoice, operating cost records, etc. The face of the envelope, or record, showing the information to be recorded thereon, is illustrated in Figure 1.

FIGURE 1

EQUIPMENT RECORD LOCATION NAME AND DESCRIPTION ACCESSORIES, IF ANY SERIAL NUMBER MOTOR NUMBER DATE OF ACQUISITION CAPACITY Group Classification Local Number
	Valuation Account
Date	Reference	Debit	Credit	Balance

The first step is to wind up the present records covering existing equipment and transfer the information to the new form of equipment records. It may be necessary to have a physical inventory taken, particularly if the past records are incomplete and unreliable. Thereafter, it is a simple matter to record the required information as new equipment is acquired.

Manufacturers' descriptions, particularly serial numbers, are often confusing as well as lengthy and cumbersome, therefore a system of local identification symbols is a necessity. A combination of letters and figures would appear the best answer for this purpose, using letters to designate a certain group of equipment and serial numbers to identify the machines within that group. For example, automobiles are to be considered as one group and assigned the letter A. The first vehicle in that group is assigned number 1, the second number 2 and so forth. Therefore, the first automobile will be identified by the symbol A-1. Such symbols are to be painted, stencilled or otherwise affixed to the machine in a prominent place. Such a system not only provides prompt identification but also facilitates the work involved in keeping the records. It also lessens to some degree the margin of error in charging and distributing cost items.

Location may or may not be a problem depending upon the size and nature of the business. It can be a problem if equipment is assigned to different jobs at more than one location and transfers are common between locations. Such a record must, of necessity, be flexible under these conditions because transfers preclude the assignment of a permanent record of location. The problem can be resolved by including a slot with a cellophane or similar transparent cover in which to insert the proper tabs as transfers are effected.

The other information required appears self-explanatory and, in most cases, may be transcribed direct from the purchase invoice.

This record provides a description, identification, location and a detailed account from which the trial balance can be prepared at the end of an accounting period; also a complete and up-to-date history of the machine and its performance for ready reference. The fact that the information is complete and all inclusive on one record must be considered most important.

Stores and payroll records

It is assumed that the stores and payroll records and accounting will follow the normal routine under the supervision of the accounting department rather than a separate section within the department.

Equipment log book

The equipment log book is used by the operator to record daily such data as the nature of the work performed, unusual working conditions, irregularities noted in connection with machine performance, replenishment of fuel or oil, preventive maintenance including greasing and oiling, replacement of parts or accessories, nature of repairs and any other information of a pertinent nature concerning machine operation and performance. Serial numbers or other similar information is required in connection with the replacement of accessories or parts, such as tires, batteries, etc. It is a permanent record to accompany the machine during its operating life. It is of particular value in connection with mechanical supervision because it can be readily and easily determined if the machine is receiving proper care through preventive maintenance including servicing at regular intervals. It is also effective in drawing the attention of the operator to the fact that his responsibilities include not only the operation of the machine but also maintenance and repairs.

Operator's daily report!

The operator's daily report, as shown in Figure 2, is used by the operator to record the details of work performance and operating time. It is completed in duplicate and the original made available to the accounting department at the end of each accounting period.

FIGURE 2

OPERATORS' DAILY REPORT MECHANICAL AND MOTORIZED EQUIPMENT LOCATION DATE EQUIPMENT NAME NUMBER
Nature of Work	Mileage	Machine Hours	Weight Volume	Operator's Hours
Totals............
Other details including explanation of lost time: Signature

The duplicate copy is retained until information is available to indicate that the details meet with the requirements of the accounting department and that no further explanations are necessary.

The report is used in the preparation of the equipment time and cost distribution form for developing equipment operating costs.

A very important consideration is the necessity of impressing the operator with the importance of recording simple and accurate information in order that the resulting operating performance and cost data will be reliable.

Particulars concerning the completion of the report are as follows:

1. The same report form is to be used for all types of equipment.

2. The machine hours and/or mileage is to be recorded in the proper columns.

3. The pay load is to be recorded in the columns weight/volume and expressed in terms of weight or volume in accordance with the cost information desired. Obviously this column is not to be used in connection with many or most items of mechanical equipment.

4. A brief but concise description of work performed is to be recorded in the column headed, Type of Work. The eventual cost distribution originates from this source, therefore, it is essential that the work is accurately described in order to assure a proper cost classification.

5. Speedometer readings, when available, are desirable. It is essential that it be recorded for all vehicles on which unit costs are developed on a mileage basis.

6. An explanation covering lost time while on an assignment is essential. It is not intended to cover lost time between assignments.

Equipment time and cost distribution

Equipment time and cost distribution, see Figure 3, is to be completed from the operators' daily report. The proper charge to the respective cost accounts is developed through calculating the total working time by the tariff or fixed rate. It provides the basis for the accounting entry and the information concerning the operating mileage/hours noted on the equipment operating cost record.

FIGURE 3

Equipment operating cost record

Equipment operating cost record, see Figure 4, is completed at the end of each accounting period and filed with the equipment record. The operating costs are posted from the ledger account and operating medium from the equipment time and cost distribution. Unit costs are calculated on each individual cost item for the period to date only. The estimated unit costs developed in connection with establishing the tariff or fixed rates are to be recorded in the column provided for that purpose.

FIGURE 4

FIGURE 5

SUMMARY OF EQUIPMENT OPERATING COST

GROUP CLASSIFICATION
PERIOD

Summary of equipment operating costs

The summary of equipment operating costs, see Figure 5, is to be prepared from the individual operating cost records and distributed to management. A separate report is required to cover each group classification in order to provide a ready comparison of operating costs by units in that classification.

Equipment appraisal

The equipment appraisal form, see Figure 6, is developed from cost and performance records covering past service and estimates by qualified personnel concerning future life expectancy. This information is of particular value when arriving at a decision concerning replacement, etc. However, it must be borne in mind that the value of the information is dependent upon the degree of care exercised in developing the estimates. Any estimate which is developed with the view of producing a desired result nullifies the appraisal. It its a difficult situation to control and must be carefully weighed in conjunction with the personnel involved.

FIGURE 6

A hypothetical appraisal is reproduced in order to simplify the following comments in connection therewith. The example is developed on the basis of a tractor purchased in 1952 at a cost of $12,000. Replacement cost, present and future, is estimated at the same amount, although it would almost certainly not hold true under actual experience.

Records indicate that the cost of fuel, oil and servicing, including minor adjustments, does not increase to any appreciable extent as the use of the machine increase so that it is not necessary to take these cost items into consideration in determining time for replacement. On the other hand, they indicate that the cost of repairs per hour or mile do increase with the use of the machine. The cost to the operation of lost time due to repairs is a factor which varies under different circumstances and is not given consideration in this appraisal.

Section 1 covering the present cost does not present any particular problem because, with the exception of items two and three, the information is developed from the equipment operating cost record. Items 2 and 3 are estimates based on available information concerning current prices and trade-in allowances.

Section 2 covering the estimated future cost includes the present costs and estimates to cover the additional life, cost of overhaul and normal repairs necessary to keep the machine in operation during that period. It also provides for an adjusted trade-in value at that time.

The increase in the expected total upkeep cost per hour of 16 cents represents a cost penalty of $1,920 if the machine is overhauled and kept in service; thus it provides reasonable assurance that a replacement is in order.

Analysis and interpretation

It should now be assumed that the system described herein has been in effect during a full accounting period and that the accounts and records provided the following information:

Trial Balance - Operating Costs

Trial Balance - Income Accounts

Item	$
B-1	4,455
B-2	4,455
B-3	3,564
B-4	2,970
TOTAL	15,444

Equipment Operating Costs

	Item	Item	Item	Item
	B-1	B-2	B-3	B-4
	$	$	$	$
Fuel	1,350	1.350	1,080	900
Lubricating Oil & Grease	75	75	60	50
Tires	300	450	240	150
Repairs	975	1,275	600	500
Accessories	30	-	12	20
Registration	150	150	150	150
Insurance	75	75	75	75
Write-off	1.500	1.500	1,500	1,500
Miscellaneous	-	30	24	-
TOTALS	4,455	4.405	3,741	3,345

Operating Costs per Hour

	Item	Item	Item	Item
	B-1	B-2	B-3	B-4
	$	$	$	$
Fuel	0.90	0.90	0.90	0.90
Lubricating Oil & Grease	0.05	0.05	0.05	0.05
Tires	0.20	0.30	0.20	0.15
Repairs	0.65	0.85	0.50	0.50
Accessories	0.02	-	0.01	0.02
Registration	0.10	0.10	0.12	0.15
Insurance	0.05	0.05	0.07	0.08
Write-off	1.00	1.00	1.25	1.50
Miscellaneous	-	0.02	0.02	-
TOTALS	2.97	3.27	3.12	3.35

The ledger accounts (general or subsidiary) provide the information concerning the operating costs and income accounts, whereas the details of the operating costs and unit costs per hour may be developed from the equipment operating cost record and the summary of equipment operating costs. It is to be noted that reconciliations are necessary because the forms are not designed to reflect the details over any particular accounting period.

The income accounts are developed on the basis of the tariff or fixed rate of $2.97 calculated on the following operating time.

Item	Hours
B-1	1,500
B-2	1,500
B-3	1,200
B-4	1,000

Registration, insurance and write-off are of a fixed nature and remain constant regardless of operating time involved. The write-off was dictated by the general accounting policy which, in this instance, was over a period of three years.

The undistributed balance in connection with these particular items of equipment is $1,002. and is absorbed in costs as an item of overhead.

The operating cost and income account in connection with item B-1 are developed to illustrate the optimum, which is exact agreement. Such a condition occurs only when actual operating time and costs are identical with the estimates.

The undistributed balance in connection with item B-2 reflects an operating loss of $450, which is accounted for by excess tire and repair costs. A review of the operating records would very likely indicate one of the following three reasons:

a) inferior or faulty item of equipment;
b) unusual operating conditions;
c) inefficient operator.

The important point is that it provides management with reasonably sound facts to take corrective steps.

The undistributed balance in connection with item B-3 reflects an operating loss of $177, despite the fact that repair costs were considerably less than provided in the operating cost estimate. The chances are that this situation is temporary and that the repairs will show a sharp increase within the near future. The other item of costs to reflect a substantial variation is the write-off. The examination reveals that, in view of the normal accounting procedure concerning write-off, the operating costs of this particular item of equipment includes a cost penalty because there was not sufficient work available to meet the normal operating time. The same situation is also true with respect to other items of fixed charges, i.e., insurance and registration.

The undistributed balance in connection with item B-4 reflects an operating loss of $375. The same situation exists here as in connection with item B-3, except that the excess unit costs in connection with fixed charges are even more pronounced because of less actual operating time. It is possible that an examination of the records covering this item of equipment in conjunction with those covering item B-3 may indicate that it would be more economical to dispose of one piece of equipment and hire outside equipment to perform the additional work above and beyond the normal operating time, estimated at 1,500 hours.

The examples enumerated above are not intended to be all-inclusive, but merely to indicate what may be revealed for corrective action through a system which provides adequate records and, what is more important, a proper follow-up through analysis and interpretation of the records.

Conclusion

It is the writer's opinion that, in view of the large capital investment involved, together with high costs of operating and maintaining mechanical and motorized equipment, it is absolutely essential to develop and support an adequate cost system to provide reliable facts as an aid and guide to management.

A plywood boat for river travel in France, to be fitted with an outboard motor. Courtesy, Centre technique du Bois

A prototype model of a molded wooden car body. A limited production of such custom-built cars in this type of wood construction is intended in the United Kingdom. Courtesy, "Timber Technology"