Cost sheet

Definition:For determination of total cost of production a statement showing the various elements of cost is prepared. This statement is called as a statement of cost or cost sheet. Cost sheet is a statement, which provides for the assembly of the detailed cost of the total cost of job operation or order. It brings out the composition of total cost in a logical order, under proper classifications and sub-divisions. The period covered by the cost sheet may be a week, a month or so. Separate columns are provided to show the total cost and cost per unit. In case of multiple products a separate cost sheet may be prepared for each product. Alternatively, separate columns of total cost and unit cost may be provided for each product in the same cost sheet. A cost sheet is prepared under output or unit costing method.

Purposes of making Cost Sheet

Cost sheet serves the following purposes: 1. It gives the breakup of total cost under different elements. 2. It shows total cost as well as cost per unit 3. It helps comparison with previous years. 4. It facilitates preparation of tenders or quotations 5. It enables the management to fix up selling price 6. It controls cost.

Importance of Cost Sheet 1. determining cost after they are incurred. It also helps to ascertain the actual Cost Ascertainment: - The main objective of the cost sheet is to ascertain the cost of a product. Cost sheet helps in ascertainment of cost for the purpose of cost or estimated cost of a Job.

2. Fixation of selling price: - To fix the selling price of a product or service, it is essential to prepare the cost sheet. It helps in fixing selling price of a product or service by providing detailed information of the cost.

3. Help in cost control: - For controlling the cost of a product it is necessary for every manufacturing unit to prepare a cost sheet. Estimated cost sheet helps in the control of material cost, Labour cost and overheads cost at every point of production. 4. Facilitates managerial decisions:- It helps in taking important decisions by the management such as: whether to produce or buy a component, what prices of goods are to be quoted in the tender, whether to retain or replace an existing machine etc.

Definition of Cost
COST represents a sacrifice of values, a foregoing or a release of something of value. It is the price of economic resources used as a result of producing or doing the thing costed. It is the amount of expenditure incurred on a given thing. Cost has been defined as the amount measured in money or cash expended or other property transferred, capital stock issued, services performed or a liability incurred in consideration of goods or services received or to be received. By cost, we mean the actual cost i.e. historical cost. ICWA (UK) defines cost as the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity. The object for which the cost is to be determined can be a product or service.

Classification of Cost
Costs are classified into two bases:2

1. On Behavioral Cost 2. On Elemental Cost Behaviour means change in cost due to change in output. On the basis of behaviour cost is classified into the following categories: Fixed Cost It is that portion of the total cost, which remains constant irrespective of output up to the capacity limit. It is called as a period cost as it is concerned with period It depends upon the passage of time. It is also referred to as non-variable cost or stand by cost or capacity cost or period cost. It tends to be unaffected by variations in output These costs provide conditions for production rather than costs of production.

Variable Cost This cost varies according to the output In other words, it is a cost which changes according to the changes in output. It tends of vary in direct proportion to output. If the output is decreased, variable cost also will decrease It is concerned with output or product. Therefore, it is called as a product cost. If the output is doubled, variable cost will also be doubled. For example, direct material; direct labour, direct expenses and variable overheads.

Semi-variable Cost
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 This is also referred to as semi-fixed or partly variable cost It remains constant up to a certain level and registers change afterwards. These costs vary in some degree with volume but not in direct or same proportion. Such costs are fixed only in relation to specified constant conditions. For example, repairs and maintenance of machinery, telephone charges, maintenance of building, supervision, professional tax etc. On the basis of elements of cost An element means nature of items. A cost is composed of three elements: material, labour and expenses, Each of these three elements cab be direct and indirect. Direct Cost It is the cost, which is directly chargeable to the product manufactured, it is easily identifiable. Direct cost consists of three elements, which are as follows: Direct Material It is the cost of basic raw material used for manufacturing a product. It becomes a part of the product No finished product can be manufactured without basic raw materials It is easily identifiable and chargeable to the product For example, leather in leather wares, pulp in paper, steel in steel furniture, sugarcane for sugar etc . What is raw material for one manufacturer might be finished product for another.

Direct material includes the following: 1. All materials specially purchased for production or the process.
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2. All components purchased for production or the process. 3. Material transferred from one cost center to another or one process to another. 4. Primary packing materials, wrappings, cardboard boxes etc., necessary for preservation or protection of product. 5. Some of the items like nails or thread in the store are part of finished product. They are not treated as direct materials in view of negligible cost.

Direct Labour or Direct Wages It is the amount of wages paid to those workers who are engaged on the manufacturing line of conversion of raw materials into finished goods. The amount of wages can be easily identified and directly charged to the product these workers directly handle raw material, WIP and finished goods on the production line. Wages paid to workers operating lathers, drilling, cutting machines etc. are direct wages. Direct wages are also known as productive labour, process labour or prime cost labour. Direct wages include the payment made to the following group of workers: 1. Labour engaged on the actual production of the product. 2. Labour engaged in aiding the operations viz. supervisor, Foreman, Shop clerks and worker on internal transport. 3. Inspectors, Analysts needed for such production. Direct Expenses or chargeable Expenses It is the amount of expenses which is directly chargeable to the product manufactured or which may be allocated to product directly.

 It can be easily identified with the product. For example, hire charges of a special machine used for manufacturing a product, cost of designing the product, cost of patterns, architects fees/surveyors fees, or job cost of experimental work carried out especially for a job etc. Cost of special drawings, cost of special layout designs, patents, patterns, cost of models, surveyors fees, Excise duty, Royalty on production cost of ractifying defective work. Utility of such expenses is exhausted on completion of the job.

Indirect Cost It is that portion of the total cost, which cannot be identified and charged direct to the product. It has to be allocated, apportioned and absorbed over the units manufactured on a suitable basis. Indirect Material It is the cost of material other than direct material which cannot be charged to the product directly. It cannot be treated as part of the product. It is also known as expenses materials. It is the material which cannot be allocated to the product but which can be apportioned to the cost units. Examples are as follows: 1. Lubricants, cotton waste, Grease, Oil, stationery etc. 2. Small tools for general use. 3. Some minor items which as thread in dressmaking, cost of nails in shoe making etc.

Indirect Labour

 It is the amount of wages paid to those workers who are not engaged on the manufacturing line, for example, wages of workers in administration department, watch and ward department, watch and ward department, sales department, and general supervision. Indirect Expenses It is the amount of expenses which is not chargeable to the product directly. It is the cost of giving service to the production department. It includes factory expenses, administrative expenses, selling and distribution expenses etc. OVERHEADS OR ON COST OR BURDEN OR SUPPLEMENTARY COST Aggregate of indirect cost is referred to as overheads. It arises as a result of overall operation of a business. According to Weldon over-head means the cost of indirect material, indirect labour and such other expenses, including services as cannot conveniently be charged direct to specific cost units. It includes all manufacturing and non-manufacturing supplies and services.

This cost cannot be associated with a particular product. The principal feature of overheads is the lack of direct tractability to individual product. It remains relatively constant from period to period. The amount of overheads is not directly chargeable i.e. it had to be properly allocated, apportioned and absorbed on some equitable basis.

Classification of Overheads
1. Factory Overheads: It is the aggregate of all the factory expenses incurred in connection with manufacture of a product These are incurred in connection with running of factory It includes the items of expenses viz., factory salary, work managers salary, factory repairs, rent of factory premises, factory lighting, lubricants, factory power, drawing office salary, haulage (cost of internal transport) depreciation of plant and machinery unproductive wages, estimation expenses, royalties loose tools w/off, material handling charges, time office salaries, counting house salaries etc.

2. Administrative Overheads or Office Overheads: It is the aggregate of all the expenses as regards administration It is the cost of office service or decision making It consists of the following expenses: Staff salaries, office premises, office conveyance, printing and stationery and repairs and depreciation of office premises and furniture etc.

3. Selling Overheads: It is the aggregate of all the expenses incurred in connection with sales and distribution of finished product and services. It is the cost of sales and distribution services. Selling expenses are such expenses, which are incurred in acquiring and retaining customers.

It includes the following expenses: a) Advertisement b) Show room expenses c) Traveling expenses d) Commission to agents e) Salaries of Sales office f) Cost of catalogues g) Discounts allowed h) Bad debts written off i) Commission on sales

4. Distribution expenses It includes all those expenses, which are incurred in connection with making the goods available to customers. These expenses include the following: a) Packing charges b) Loading charges c) Carriage on sales d) Rent of warehouse e) Insurance and lighting of warehouse f) Insurance of delivery van g) Expenses on delivery van

h) Salaries of warehouse keeper, drivers and packing staff. DETERMINATION OF TOTAL COST Cost of product is determined as per cost attach concept. Total cost of a product consists of various elements of cost, which have the quality of coherence. All the elements of cost can be grouped and regrouped. Grouping and re-grouping of the various elements of costs leads to significant divisions of cost.

NON-COST ITEMSNon-cost items are those items, which do not form part of cost of a product. Such items should not be considered while ascertaining cost of a product. These are items included in profit and loss A/c as per principles of Financial Accountancy but not related to product. For example, Income-tax paid, provision for Income-tax, interest on capital, interest on loan, profit on sale of fixed assets, loss on sale of fixed assets, transfer fees received, transfer to reserves, any other appropriation of profit, commission to Managing Director or Partners, capital loss, donations, capital expenditure, discount on shares and debentures, Goodwill written off, Preliminary expenses written off, brokerage, pure financial expenses or losses and expenses not related to the business, wealth tax, bonus to directors and employees, if it is based on profit, expenses of raising capital, penalties and fines.

DIVISIONS OF COST
Prime Cost: It comprises of all direct materials, direct labour and direct expenses. It is also known as flat cost. Prime Cost = Direct Materials + Direct Labour + Direct Expenses. Works Cost:

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It is also known as factory cost or cost of manufacture. It is the cost of manufacturing an article. It includes prime cast and factory expenses. Works Cost = Prime Cost + Factory Overheads Cost of Production: It represents factory cost plus administrative expenses Cost of Production = Factory Cost + Administrative expenses Total Cost: It represents cost of production plus selling & distribution expenses Total Cost = Cost of production + Selling & distribution expenses Selling Price: It is the price, which includes total cost plus margin of profit or minus loss, if any. Selling Price = Total Cost + Profit (-Loss) Cost sheet components

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Particulars

Total Cost

Cost /Unit

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Opening Stock of Raw Materials Add: Purchases Add: Carriage Inwards Add: Octroi and custom duty Less: Closing Stock of Raw Material Cost of Direct Material Consumed Direct or Productive Wages Direct (or chargeable) Expenses Prime Cost Add: Factory Overhead: Indirect Material Indirect Wages Factory rent & rates, insurance Plant Repair and maintenance Plant depreciation Factory heating and lighting Factory manager's salary Leave wages Overtime premium Fuel & Power Works Stationery Canteen and welfare expenses Lab Expenses

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Works Telephone expenses Haulage Gas & Water Drawing Office Salaries Internal Transport expenses Supervision

Less:

Sale of scrap

Add:

Opening Stock of Work In Progress

Less:

Closing Stock of Work In Progress

Factory Cost

Add

: Office and Administration Overhead: Office Salaries Director's remuneration Telephone and postage Office rent and rates

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Printing and stationery Legal charges Depreciation on Office furniture Subscription to trade journals Office Lighting Establishment charges Director's travelling expenses Postage Legal Charges Audit Fees Depreciation and repair of Office Equipment Cost of Production Add: Opening Stock of Finished Goods

Less:

Closing Stock of Finished Goods

Cost of Goods Sold Selling and Distribution Overhead: Advertisement Salesmen's salaries and expenses Showroom rent Bad Debts

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Packing Expenses Carriage Outward Commission of Sales Agents Counting House Salaries Cost of Catalogues Expenses of Delivery Vans Collection Charges Travelling Expenses Cost of Tenders Warehouse expenses Cost of mailing Literature Sales Manager's Salaries Sales Director's Fees Showroom expenses Sales Office Expenses Depreciation and repairs of Delivery vans Expenses of Sales Branches

Cost of Sales Profit/ Loss Sales

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Cost sheet of GOOBERS CHOCOLATE

For the month of December

Particulars

Cost Unit 5.16

Per Total Cost 23,20,000

Raw material Sugar = 3,00,000 Cocoa Butter= 3,00,000 Cocoa Solids = 3,20,000 Peanuts = 2,00,000 Milk Solids = 2,00,000 Chocolate Coated Rasins= 4,00,000 Almonds= 3,00,000 Vanilin= 1,00,000 Honey= 50,000 Boston Baked Bean= 1,50,000

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Points to be considered while making a cost sheet:1) Purely financial expenses such as income tax provisions, paid, preliminary expenses written off, trade and cash discounts, loss on sale of assets, dividend proposed, paid, transfer to reserve, discount on issue of shares, debentures, etc. should be excluded from this statement. 2) W.I.P:- means the amount of money spent on a work or job or production which is not yet complete as on the last date of accounting period. Therefore, at the time of closing the books the value of W.I.P. has to be determined. Closing W.I.P becomes opening W.I.P in the next period. These two are adjusted in the manufacturing overhead. 3) Capital expenditure such as purchase of assets etc. should be excluded. 4) Incomes such as rent, commission, interest, transfer fees, profit on sale of assets, transfer from reserve, dividend received etc. should be excluded. 5) Closing material inventory is to be valued at a cost based on the method adopted. 6) Closing W.I.P is to be valued at current cost of manufacturing/factory cost. 7) Closing finished gods are to be valued at current cost of production. However the opening inventory, in the absence of information to be valued at that rate as applicable to closing inventory(Raw material or W.I.P or Finished goods).
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8) Profit and loss can be given as a percentage of (a) cost of sales or (b) Sales price. a) In this case, the profit/loss is calculated directly on the cost of sales arrived at. b) In this case, the sales price is to be calculated. Following formula is suggested: Sales price = cost of sales*100/100-percentage of profit. 9) Marketing expenses include both selling and distribution expenses. Marketing expenses are attributed to only goods that are sold in the period. (10) If cost per unit of each element is required then,a separate column is provided for the same. Cost per unit is calculated by dividing the particular item of cost by the number of units(quantity) of raw material W.I.P or finished goods as the case may be.

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