Journal of Accountancy

Volume 58 Issue 5 Article 3

11-1934

Accounting for Creamery and Dairy Products

John H. Worman

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Worman, John H. (1934) "Accounting for Creamery and Dairy Products," Journal of Accountancy: Vol. 58 :
Iss. 5 , Article 3.
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 Accounting for Creamery and Dairy Products
By John H. Worman

Dairying had its beginning in antiquity, at a time when no­

madic tribes roamed over wide areas seeking pasturage for their
flocks. In these simple surroundings, the art of butter-making
also originated, probably when some traveler found his milk
churned to butter after a long trip on camel’s back.
After long years of evolution, we have our modern creameries
and dairies. The first creamery should, in all probability, be
credited to the Swiss, who early sent their cows to a central
organization in the upper pastures, where most of the milk was
made into cheese, and each farmer was paid in due ratio, accord­
ing to the yield of his few cows. Modern creameries and dairies
are said to date from 1866, when the first distributing society was
founded in Denmark.
Through the use of modern machinery and equipment, milk
is now converted into several varieties of dairy products, with
annual sales running into billions of dollars, so that dairying and
its allied industries rank, approximately, fifth in the United
States.
Milk production is highly technical, because of legal require­
ments of cleanliness, etc., and competition is so keen that the
margin of profit is very small.
The large dairy usually purchases its raw products from small
dairy farmers. The raw milk is delivered daily by the producers,
either to small creameries, milk shipping stations or direct from
the farm to the dairy plants, where the milk is subjected to
chemical and bacteriological analyses and is put through several
processes before it is ready for delivery to our homes.
The main products, which are the results of processes and
manufacturing operations to be discussed later, are here briefly
described in order that the accounting methods set forth later
may be better understood.

GRADES OF MILK

Under standard milk ordinances, now in effect in most cities,

the following grades of milk are produced :
Grade A (raw) Bacterial count not to exceed 10,000 per cubic centimeter at
the time of delivery.
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Pasteurized:
Grade A Bacterial count same as Grade A raw milk.
Grade B Bacterial count not to exceed 50,000 per cubic centimeter at
time of delivery.
Grade C Bacterial count not to exceed 50,000 per cubic centimeter,—
used only for cooking and manufacturing purposes.
The minimum milk standard is as follows:
Butterfat.................................................. 3.0%
Milk solids.............................................. 8.5
Water in fluids........................................ 88.5

Total.................................................... 100.0%
CREAM
Cream is extracted by separating it from the skimmed milk
in the process of utilizing surplus milk, or else it is purchased
outright. It is produced in grades ordinarily known as “heavy,”
“medium” and “light” cream. Cream, both sweet and sour,
is sold direct to the trade, and the surplus is churned into butter.
MANUFACTURED PRODUCTS
Buttermilk:
Buttermilk is made from milk, from which the butterfat has
been removed. The milk is heated to a temperature of approxi­
mately 180° for a period of one hour to kill all harmful bacteria,
and then it is cooled to 70° before being inoculated with lactic
acid bacillus, which produces what is known ordinarily as butter­
milk. Bulgarian buttermilk is similarly produced from whole
milk by inoculation with lacto bacillus bulgaris. The bacteria
are allowed to propagate for 18 hours at 70°, after which the curd
is broken, cooled, stirred to a creamy consistency and bottled.
Cottage cheese:
Cottage cheese is fresh curd of milk, produced by allowing
bacteria to grow for a time in skimmed milk. The curd is cut
into small bits, and heated; the whey, or watery portion is then
drained off, after which the curd is cooled, washed and mixed with
cream and salt.
Butter:
Butter is produced by churning cream, and is composed ap­
proximately of:
Butterfat.............................. 80%
Milk solids.................................................. 1
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Salt.............................................................. 3
Water.......................................................... 16

Total........................................................ 100%

Other by-products:
The great variety of dairy products such as powdered or con­
densed milk, cheese, ice-cream, etc., make it impracticable to
attempt to discuss them all, and these comments will be con­
fined to the operations of fluid-milk dealers, who manufacture
buttermilk, cottage cheese and butter mainly to utilize their
surplus milk.

FUNCTIONAL DEPARTMENTS

Functional control of costs and expenses is made possible

by proper departmentalization. Departmental expenses fall,
naturally, into two classes, as follows:
1—Producing
2—N on-producing
Under producing come purchasing, processing and manufac­
turing, while non-producing includes sales, administration and
service departments.

PURCHASING

When the milk is delivered to a plant, it usually is received by

two employees, who weigh and sample it by taste for freshness and
flavor. Since butterfat content is the basis on which milk is
purchased, samples must be sent to the laboratory for testing.
These tests are made eight or nine times monthly (or as agreed)
and the tests are averaged at the end of the month. The average
serves as the basis of settlement with the shippers.
The receiving employees make a duplicate report on each
shipper’s supply. The original is given to the shipper as a re­
ceipt and the duplicate is sent to the office, daily. From this the
shippers’ ledger is posted. This report should show the shipper’s
number, date, pounds received and disposition, either to pas­
teurizing or separating departments. Milk is usually converted
from a poundage basis to gallons after leaving the receiving de­
partment, and the conversion is made on the basis of 8.6 pounds
to the gallon.
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 Accounting for Creamery and Dairy Products

The total milk receipts should be reconciled daily with reports

of milk utilized in the various departments, on the basis of butter­
fat content, and the shrinkage should be ascertained, both in
pounds (butterfat) and percentage. In most plants this shrink­
age should never exceed 3 per cent. This reconciliation must be
made in order to account for the disposal of all milk received at
the plant.
Pounds of butterfat are computed by multiplying the pounds
of milk received by the average daily test, e.g.—50,000 lbs. re­
ceived, average test 4.4 per cent. butterfat (B.F.) in pounds
equals 50,000 times 4.4 or 2,200 lbs. Thus, if the milk actually
utilized in the plant for the day was 2,145 lbs. (B.F.), the shrink­
age was 55 lbs. or 2.5 per cent.

PROCESSING

Processing includes the following operations:

1—Filtration
2—Pasteurization
3—Standardization
4—Separation
5—Washing
6—Filling
7—Cooling
Upon leaving the receiving room the milk is carried by sanitary
pipes to a preheater, which heats the milk to 110°. From this
heater it flows into a filter, where dirt and other foreign sub­
stances are removed. The preheating is necessary in order to
make the milk flow freely, since cool milk will not filter properly.
The milk flows from the filter into the pasteurizing vats (usu­
ally 300-gallon capacity) for pasteurization. Pasteurization con­
sists of heating the milk to a temperature from 142° F. to 145° F.
for thirty (30) minutes and then cooling rapidly to 40° F. by pass­
ing over brine pipes in a stainless steel cooler. The brine tem­
perature is kept at 10° above zero F. and the milk enters at
the top at a high temperature, reaching the bottom at 38°
to 40° F.
While in the pasteurizing vat, the milk is standardized; that is,
if the milk to be bottled or otherwise disposed of is to test 5 per
cent., enough cream is added to bring the whole quantity up to the
test required.
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After being pasteurized, the milk is transferred at accumulated

cost either to the bottle filler or to the separators.
In the separating department, centrifugal machines separate
the milk, so that less than .01 per cent. of fat remains in the
skimmed milk. The cream realized from the separation of milk
from the pasteurizing department or from returned milk is stand­
ardized to various grades in whatever quantities are required for
sale to customers, and that part is immediately transferred to the
cold room for distribution, while the remainder is transferred to
vats preparatory to churning. The cost of separating is partly
compensated by the value of the skimmed milk utilized in the
manufacture of buttermilk and cottage cheese. The skimmed
milk value is computed on an arbitrary basis, usually 20 per cent.
of the cost of the whole milk at the separator.
The pasteurized milk necessary to meeting the bottling require­
ments is transferred to the filling department (at accumulated
cost), where it is bottled and capped by automatic machinery at
the rate of 70 pints or 50 quarts a minute. The milk is then
taken by conveyors to the cold room for distribution to customers.
Empty bottles and cases are carefully washed and sterilized.
Bottle-washing machines wash and sterilize approximately 800
bottles at once. Sixteen minutes are required for proper steriliza­
tion. The clean bottles travel by conveyor (untouched by hands)
to the filler machines. Careful inspection is made of clean
bottles on the conveyor line to remove any chipped or broken
bottles.
COST OF PRODUCTS

Each department should make out a daily report showing open­

ing inventory, receipts, transfers and closing inventories. This
information is assembled by a clerk, who accumulates the data on
summary sheets for the purpose of showing monthly costs. These
reports, etc., should be kept in pounds (and gallons if desired),
and the money value should be computed at the end of the month.
The finished cost of milk in the cold room consists of the cost of
raw product (which in the milk industry constitutes the greater
portion of the finished product cost), with processing costs as­
sembled from the departmental expense accounts and allocated
monthly to the various departments. The expenses should be
gathered in cumulative form, so that it will be necessary to dis­
tribute only monthly totals.
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 Accounting for Creamery and Dairy Products

There are many methods of distributing overhead or depart­

mental expenses, but probably the most troublesome of all is the
method used in distributing steam, refrigeration, water and heat,
which is best accomplished by means of standards ascertained by
each company for its own use.
Expenses applicable to departments should be prorated to the
products which pass through any particular department, on the
basis of units handled in that department. As a product is trans­
ferred from one department to another, the cost as accumulated
in the previous department should be carried over to the succeed­
ing department, so that the cost at each step of production may
be known and the loss occasioned by reason of the transfer from
one department to the other should be placed upon the depart­
ment relieved, as for example:
Unit Product
Gallons cost cost
Milk transferred from pasteurizing department. . . 50,000 $.300 15 ,000
Total shown by filler reports................................... 49,500 .323 15,000

Shrinkage.............................................................. 500

The shrinkage of 500 gallons (1%) is absorbed in the product

cost, 49,500 gallons divided into the accumulated cost of $15,000
or a unit cost of $0,323 per gallon, instead of $0.30, carried over
from the previous department. To this product cost would be
added washing, filling and cold room expense as allocated on some
“unit” method of allocation, such as cans, cases, boxes, etc.
MANUFACTURING

In the manufacture of buttermilk and cottage cheese, there is

the cost of the skimmed or raw milk transferred, to which is added
the respective departmental expenses; and in the case of cottage
cheese, there are container and packing expenses.
BUTTER MAKING

All cream received should be weighed and sampled for butterfat

content, for the purpose of determining proper payment, where
cream is received from the shipper, or for purposes of credit to
other departments, when products are transferred to the butter
department. After being pasteurized the cream is pumped into
vats for “ripening.” These vats should be measured for volume
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of cream and tested by composite sample to determine the butter­

fat content. This is necessary in determining churn over-run.
From plant report summary and cost sheets the churn-room report
would be approximately as follows:
Cream Pounds Unit Cost
(Figures not actual) gallons B.F. cost value
Cream purchased............................................ 3,400 9,500 $.30 2,850
Surplus cream................................................. 1,300 4,500 .30 1,350
Cream dumped.......................................... . . 500 1,400 .30 420

Total to churns.......................................... 5,200 15,400 4,620

Add—over-run—20%.................................... 3,080
Churn-room expenses..................................... 115

Total to packing room............................... 18,480 $.256 4,735

Less—print loss—2 %.................................... 370

Butter packed............................................. 18,110 $.261 4,735

Add—packing expense................................... 300
Cold-room expense—pro-rata............. 15

Cost of butter packed................................ 18,110 $.278 5,050

RETURNED AND SURPLUS PRODUCTS

Milk dealers make a constant effort to reduce the loss due to
returned products, which seem to be a necessary evil, and such
losses must be carefully and thoroughly checked, to guard against
increased losses through collusion of employees.
Distributors of fluid milk and cream are burdened with the
problem of an over-supply of milk in the months of high produc­
tion, because sufficient milk must be assured to meet consumer
demands in the season of low production. This surplus milk must
either be sold in bulk at any price obtainable or be manufactured
into by-products. The surplus product, if costed at average cost
value, will be burdened with an inflated cost, and it is better to
cost it at an equivalent of the prevailing market price. The
difference between actual cost and the surplus raw product value
represents surplus product loss, which should be allocated to
fluid-milk cost on a basis of fluid-milk-product sales.
PRODUCT COST STATEMENT
The product-cost statement should be prepared to show, in
analytical form, the actual cost and profit or loss for each product
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handled, according to size of package and whether sold at retail

or wholesale. When prepared on the basis of sales units or points
(variously established), the statement may be made to show unit
cost and profit or loss according to products for statistical and
managerial purposes.
COLD-ROOM AND LOAD OUT REPORTS

Finished products in cold room are the equivalent of uncon­

verted cash and must be protected against theft and errors in re­
porting. If practicable, a storekeeper should be put in charge of
the cold room to check carefully all goods in and out of the room.
All removals should be on the basis of requisitions showing dis­
position to retail routes, wholesale routes, special deliveries and
retail stores or selling stations. Receipts and disbursements of
the cold room should be summarized on a daily cold-room report.
This report shows an opening inventory by actual count (a.m.)
to which all receipts properly classified are added. From this
total charge are deducted all requisitions for withdrawals,
extras to routes and stores, transfers, breakage, etc., resulting in
a “balance to be accounted for (p.m.).” Here the report should
provide for another actual count, say at 7 p.m. in order definitely
to place responsibilities for shortages on the day or night attend­
ant.
At this point the route “load out” reports are summarized and
deducted from the “balance to be accounted for (p.m.),” which
leaves a balance on hand to be verified by an actual (a.m.) count,
all “overs” and “short” to be noted at the bottom of the cold­
room report. The overage or shortage of each product should be
carefully checked daily by some responsible person. The daily
variations should be summarized and careful comparisons made
monthly, from which standard losses may eventually be estab­
lished.
The accuracy of the “load out” summaries should be closely
watched, as these reports are sometimes made to cover up dis­
crepancies of route men and others.
ROUTE ACCOUNTS

The territory served by the dairy is subdivided into routes, and

each route is served by a delivery crew consisting of a driver and a
helper. Route service is supplemented by special delivery serv­
ice, which takes care of orders requiring immediate delivery.
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Route accounts are handled differently from customers’ ac­

counts in most industries. The number of customers served
sometimes runs into thousands even in a medium-sized business.
A greater part of the work of keeping customers’ accounts falls on
the delivery men or route men. Route sheets are made up the
first of each month and are arranged in order of delivery when
turned over to the route men. These sheets show unit sales of
products by days and the record of sales is entered when the
delivery is made.
Different colored sheets are used for cash and credit customers.
The route men are charged at sales price with all products
taken out, according to a loading requisition and “load out”
sheets, and also for extras. Credit is given for products returned,
as per “return” slips and the wholesale or other discounts and the
result is the net total daily sales. Settlement should be made
daily for the net total sales, after deducting for “charge” sales
made, bottles purchased, coupons, etc., and after adding collec­
tions made on charge accounts. In this manner control is
maintained over the driver’s balances. The route books are
compared at regular intervals with the current balances outstand­
ing as shown by the office accounts or route men’s settlement
sheets.
The settlement sheets should provide space for reconciling
bottles, cans, etc., in service. These sheets are checked by the
cashiers and recapitulations are made, by clerks, on a route sales
sheet providing for a full month’s sales. The same sheets are
also summarized to show daily sales in quantities and amounts,
by products, according to size of container.
patron’s settlement sheet

The patron’s settlement sheet is peculiar to the industry and

needs some explanation. It sets up in convenient form, the daily
weights of milk furnished by patrons, also the pounds of butterfat
of cream purchased, as cream is usually paid for on the day follow­
ing receipt. It shows the total value of milk purchases for the
month and also the deductions for advances, supplies furnished,
dairy products taken for own use, and sometimes for association
expenses, if included in the purchasing agreement.
Milk is usually purchased on the basis of a certain fixed daily
or monthly maximum, and any milk in excess is paid for as surplus
milk, at a different base price, according to the then prevailing
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 Accounting for Creamery and Dairy Products

buying plan, and the patron’s sheets should provide space for
separate computation of “regular” and “surplus” requirements.
At the end of the month or other pay period, the sheets are com­
puted and cheques for undrawn balances are mailed to patrons.
BOTTLE LOSS

Many methods are used to account for bottles. Sometimes

they are classified physically, as current assets, sometimes as
fixed assets, and at other times are written off as expense, when
put into service.
The best method probably is to set up the bottles in service by
actual inventory of filled and empty bottles in use and to make
an estimate of bottles out on routes, i.e., two, three or more to each
customer, based on two times the average daily sales units. The
total bottles in service, thus computed, should be valued at, say,
one-half the original cost per unit, and would be shown as a
current asset in the balance-sheet. New bottles should be
charged to manufacturing and operating supplies, when pur­
chased, and credited thereto when put into actual use and
charged to “bottles in service.” At the end of the month, or
other period, a new inventory of bottles in service should be
taken, in the manner described above, and the difference between
the new inventory and the debit balance in bottles-in-service
account should be charged to bottle loss, which is a profit-and-
loss account. Milk cans and bottle cases should be classified as
fixed assets and valued at cost less 40 per cent. or 50 per cent.
Other inventories do not present any special problems of valua­
tion not found in other industries.
PROPERTY, PLANT AND EQUIPMENT

Fixed assets, particularly buildings and machinery, present

somewhat of a problem. Buildings are usually of a special type,
which can not readily be converted to other purposes, and this
should be taken into consideration in setting salvage values and
in establishing depreciation rates. The machinery and equip­
ment accounts present the problem of numerous kinds of special
items, most of which have a different useful life, for which a com­
posite rate can not be used in setting up depreciation reserves.
The rates of depreciation usually applicable to the different
types of machines and equipment are too varied to describe here.
The rates can best be established by experience, but suggested
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uniform rates have been formulated by milk dealers associations

and by the bureau of internal revenue.
A recent treasury decision, 4422, February 28, 1934, makes it
mandatory to classify fixed assets according to length of life, in
order that the taxpayer may be able to substantiate for federal
income-tax returns the rates of depreciation used.

RESALE VALUE OF ROUTES

Competition in the acquisition of routes and customers has

brought about a condition that requires comment. Dairy cus­
tomers are often acquired by purchase from other dealers, by
campaigns of direct solicitation, and sometimes by payment of a
"premium” to the customer for his trade. This cost of acquiring
trade is usually charged to an account called resale value of routes.
This account is almost in the same category as goodwill, and it is
very difficult to place a value on it for balance-sheet purposes.
The proper valuation would be cost outlay, reduced periodically
for loss of customers, but the time involved makes it difficult for
an accountant to make any verification.

BALANCE-SHEETS

Balance-sheet items requiring special comment have already

been mentioned. A study of balance-sheets and operating state­
ments of dairies and milk dealers will reveal that there is a very
rapid turnover, due to the more or less perishable nature of the
products handled. For this reason, a large current ratio is not
necessary; a ratio of slightly in excess of one to one is considered
sufficient. A condensed pro-forma balance-sheet follows:
Blank Creamery & Dairy Company
Balance-sheet—August 31, 193—
Assets
Current assets:
Cash in banks and on hand........................................ $ xxxx
Customers’ notes receivable (less reserve $xxxx).... xxxx
Customers’ accounts receivable:
Route accounts—drivers......................................... $ xxxx
Retail accounts—office............................................ xxxx
Wholesale accounts—office..................................... xxxx

$ xxxx
Less—reserve for doubtful...................................... xx xxxx

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 Accounting for Creamery and Dairy Products

Inventories:
Finished products, milk, cream, cheese, etc.—
at cost............................................................... $ xxxx
Bottles in service—at cost less 50%...................... xxxx
Operating supplies—at cost.................................... xxx xxxx

Total current assets............................................. $ xxxxx

Prepaid insurance, interest, stationery, etc................... xxx
Real estate—not used for plant purposes...................... xxxx
Property, plant and equipment—at cost:
Land......................................................................... $ xxx
Buildings...................................................................... xxx
Machinery and equipment.......................................... xxx
Cans and cases in service............................................ xxx
Office furniture and fixtures....................................... xxx
Delivery equipment.................................................... xxx

$ xxxxx
Less—reserve for depreciation.................................... xxxx xxxxx
Resale value of routes (state basis)............................... ===== xxx

Total..................................................................... $xxxxxx

Liabilities
Current liabilities:
Notes payable—banks................................................ $ xxxx
Notes payable—machinery......................................... xxxx
Accounts payable—trade............................................ xxxx
Accounts payable—patrons for milk and cream........ xxx
Outstanding milk tickets, and store bottles.............. xxxx
Accrued liabilities........................................................ xxxx
Provision for federal taxes.......................................... xxxx

Total current liabilities....................................... $xxxxxx

Capital stock—common:
Authorized 1,000 shares of $xxxx each......................
Whereof outstanding 750 shares................................. $xxxxxx
Earned surplus................................................................ xxxxx xxxxxx

Contingent liabilities reported—(state nature and

amount).................................................................... $xxxxxx

Total..................................................................... $xxxxxx

OPERATING STATEMENTS

The detail of operations to be presented depends entirely upon

conditions and the scope of the examination. It is unnecessary
to repeat statements of details of operations and relative statisti­
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cal data, if already prepared by the company’s accounting de­

partment. A condensed profit-and-loss account, supplemented
by a schedule of departmental expenses, follows:
Blank Creamery & Dairy Company
Condensed profit-and-loss account for the year ended August 31, 193—
Sales:
Retail sales................................................................ $ xxxxx
Wholesale sales.......................................................... xxxxx
Total gross sales................................................ $ xxxxxx
Less—sales discounts and allowances...................... xxxx
Net sales to customers...................................... $ xxxxxx
Cost of sales:
Cost of production:
Purchases of raw product..................................... $ xxxxx
Purchasing expenses.............................................. xxxx

Cost of raw materials........................................ $ xxxxx

Processing expenses............................................... xxxx
Manufacturing expenses........................................ xxxxx

Total cost of production.................................... $xxxxxx

Add—purchases of finished products....................... xxxxx

Deduct—inventory increase: $xxxxxx

Finished products—August 31, 193—.... $xxxx
Finished products—August 31, 193—.... xxxx xxxxx

Cost of sales....................................................... xxxxxx

Gross margin (or loss) on sales..................... $xxxxxxx
Operating expenses:
Selling expenses..................................................... $ xxxxx
Administration and general expenses....................... xxxxx xxxxx

Net operating profit (or loss)............................. $xxxxxxx

Miscellaneous income:
Interest earned—etc............................................... xxxx
Miscellaneous charges: $xxxxxxx
Interest paid.............................................................. $ xxxxx
Loss on capital assets sold........................................ xxx xxxxx

$ xxxxxx
Provision for federal taxes............................................ xxxx
Net income (or loss)......................................... $ xxxxxx

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 Accounting for Creamery and Dairy Products

Blank Creamery & Dairy Company

Statement of departmental expenses for the year ended August 31, 193—
Purchasing expenses:
Country buying expenses.......................................... $ xxxxx
Transportation............................................................... xxxxxx
Receiving labor.............................................................. xxxxx
Laboratory expense....................................................... xxxx
Total purchasing expenses.................................... $ xxxxxx
Processing expenses: (detail by processes)
Pasteurizing expenses................................................ $xxxx
Standardizing expenses.................................................. xxxx
Separating expenses...................................................... xxx
Washing bottles, cans, etc............................................. xxxx
Filler-room expenses...................................................... xxxx
Cold-room expenses....................................................... xxxx

Total processing expenses...................................... xxxxxx

Manufacturing expenses: (detail by kinds)
Butter expenses......................................................... $xxxx
Butter packing............................................................... xxx
Buttermilk expenses...................................................... xxxx
Cottage cheese............................................................... xxxx

Total manufacturing expenses.............................. xxxxxxx

Statistical data:
Unit cost Unit
Kind of expense:
Purchasing.................................................. $xxxxx Gallons purchased
Pasteurization............................................. xxxxx Gallons pasteurized
Separating................................................... xxxxx Gallons separated
Washing...................................................... xxxx Bottles or cans
Filler room.................................................. xxxx Bottles or cans
Cold room................................................... xxxx Cases, boxes, cans
Butter manufacturing................................ xxxx Pounds
Butter packing............................................ xxxx Pounds
Buttermilk manufacturing......................... xxxx Gallons
Cottage cheese............................................ xxxx Pounds
Selling and administration and general expenses are similar in
classification to those of other industries and no schedules are
considered necessary. Selling and administration expense sta­
tistics are computed to fractional cents per point. The point
basis is usually established by starting with one quart of milk
equalling one point, and other products are converted to points,
their unit value depending on their cost and sales value as well
as the length of time necessary to complete the delivery to
customers.
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