Cost Sheet

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Abstract

Effective management information systems are a basic need of every administrator of an


organization. This general discussion of the subject of cost accounting enables the
administrator to develop a standard cost system and its related detail cost sheets as a
management information tool. Detail cost sheet can be useful in reviewing utilization of
group resources, establishing the basis of cost per unit, setting a uniform margin of expected
profit, and as a guide in negotiation of contracts with third party payers.
Objective of the project

The main objective of this project is to show how to obtain an accurate product cost. It gives
us both the total cost and cost per unit of a product. And in case of fixing the selling price of a
product, we need to create a cost sheet so we can see the details of its production cost.
Contents :

 Introduction

 Importance and Objectives of Cost Sheet

 Types of Statement of Cost

 Components of Statement of cost

 Example of Statement of Cost

 Conclusion
INTRODUCTION
A cost sheet is a statement that shows the various
components of total cost for a product and shows previous data for comparison.
You can deduce the ideal selling price of a product based on the cost sheet.

A cost sheet document can be prepared either by using


historical cost or by referring to estimated costs. A historical cost sheet is
prepared based on the actual cost incurred for a product. An estimated cost
sheet, on the other hand, is prepared based on estimated cost just before the
production begins.

Importance and objectives of cost sheet


Cost sheets help with a number of essential business processes:

1. Determining cost: The main objective of the cost sheet is to obtain an


accurate product cost. It gives you both the total cost and cost per unit of a
product.

2. Fixing selling price: In order to fix the selling price of a product, you need to
create a cost sheet so you can see the details of its production cost.

3. Cost comparison: It helps the management compare the current cost of a


product with a previous per unit cost for the same product. Comparing the costs
helps management take corrective measures if costs have increased.

4. Cost control: The cost sheet is an important document for a manufacturing


unit, as it helps in controlling production costs. Using an estimated cost sheet
aids in monitoring labour, material and overhead costs at each step of
production.

5. Decision-making: Some of the most important decisions management makes


are based on the cost sheet. Whenever a business needs to produce or buy a
component, or quote prices for its goods on a tender, managers refer to the cost
sheet.

Types of costs in cost accounting


Costs are broadly classified into four types: fixed cost, variable cost, direct cost,
and indirect cost.

1. Fixed cost: These are costs that do not change based on the number of items
produced. For example, the depreciating value of a building or the price of a
piece of equipment.

2. Variable cost: These costs are tied to a company’s level of production. For
example, a bakery spends Rs.10 on labour and Rs.5 on raw materials to produce
each cake. The variable cost changes based on the number of cakes the
company bakes.

3. Operating costs: These are those expenses incurred by an organisation to


maintain the product on a day-to-day basis. Traveling cost, telephone expenses,
office supplies are some of things that come under operating costs.

4. Direct costs: These costs can be directly associated with production. For
example, if a furniture manufacturing company takes five days to produce a
couch, then the direct cost of the finished product includes the raw material cost
and labor charges for five days.
Advantages of Cost Sheet:

1. It is a simple and useful medium of communication which gives


information about costs to all levels of management in a simple and lucid
form.
2. It helps in comparative study of the various elements of costs with the
past results and standard cost. Thus it helps the management in control
process.
3. It helps the management in fixing up the selling price more accurately.
4. If acts as a guide to the manufacturer and helps him in formulating a
definite and profitable production policy.
5. It enables a producer keep a close watch and control over the cost of
production.
6. It shows the total cost and the per unit of the units produced during the
given period.
7. A cost sheet provides per unit cost of a product or service which the
organization incurs at every stage of business operation, which helps the
management to analyse and control such overheads.
8. It also helps in deciding the selling price of a product or service based on
the cost incurred and profit expected out of it.

Components & elements of total cost


Components of total cost are constituted mainly of prime cost,
factory cost, office cost and cost of sales. Let us take a detailed look at each of
these elements:

1. Prime cost: This comprises direct material, direct wages, and direct
expenses. It is also called basic cost, first cost, or flat cost. It can be defined as
an aggregate of the price of the material consumed, the wages involved in
production, and the direct expenses.

Prime cost = Direct material + Direct wages + Direct expenses


Direct material cost usually refers to the cost of raw materials used or consumed
during a given period. To calculate the amount of raw material actually
consumed during a given period, you add the opening stock and the amount of
material purchased, and deduct the closing stock. Here is the formula for
material consumed:

Material consumed = Material purchased + Opening stock of material –


Closing stock of material

2. Factory cost: This is made up of prime cost plus factory overhead, which
includes indirect wages, indirect material and indirect expenses. Factory cost is
also known as works cost, production cost, or manufacturing cost.

Factory cost = Prime cost + Factory overhead

3. Office cost: This is also called administration cost or total cost of production.
Office cost is equal to factory cost plus office and administration overhead.

4. Total cost or cost of sales: This is the sum of the total cost of production and
the total of selling and distribution overhead.

Total cost = Cost of goods sold + Selling and distribution overhead

In the production process, some units of a product are scheduled to be finished


at the end of a period. Such incomplete units are called work-in-progress. In
such situations, while calculating the factory cost of a product unit, it is
necessary to make adjustment for opening and closing stock to arrive at net
factory cost of the product. Generally, the cost of these unfinished units includes
direct material, direct expenses, and factory overheads.
Besides this, the adjustments for inventories need to be made in the following
manner:

1. Direct material consumed = Opening stock of direct material +


Purchases of direct material – Closing stock of direct

2. Works cost = Gross works cost + Opening work in progress – Closing


work in progress

3. Cost of production of goods sold = Cost of production + Opening stock of


finished goods – closing stock of finished goods

The various components of cost explained in the previous section can be


represented in the form of a statement. A cost sheet statement consists of prime
cost, factory cost, cost involved in the production of goods sold, and total cost
(Performa of cost Sheet)
Cost sheet example
Let us look at an example, in which you have to prepare a cost sheet for a furniture company
for the financial year ending March 31, 2019. Now take a look at the following information
which is available to you to prepare a cost sheet statement.
Direct material consumed – Rs.12,000

Opening stock of raw materials – Rs.130,000

Closing stock of raw materials – Rs.8,000

Direct wages – Rs.50,000

Direct expenses – Rs.10,000

Factory overhead is 100% of direct wages

Office and administration overhead is 20% of works

Selling and distribution overhead – Rs.25,000

Cost of opening stock for finished goods – Rs.10,000

Cost of closing stock for finished goods – Rs.15,000

Profit on cost is 20%


Cost Sheet Problem:

From the following information ascertain the Works Cost for the month of August

1997:
Conclusion:

A cost sheet analyses the components of cost in order to show the


per-unit cost for a given product. Business managers use cost sheets as reference documents
to help manage purchasing and production costs, and to find the right selling prices for
products and services. While there are other ways to manage costs, most companies choose to
use cost sheets because it’s an efficient way to track and control different kinds of costs.

References:

1. Cost Accounting Book by

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