COST SHEET

1. INTRODUCTION
Dear students, welcome to the lecture series on Cost accounting. Today we shall cover the Cost sheets. The objective of this lecture is to understand meaning and utility of cost sheets, the need of preparing cost sheets, the manner in which costs are classified and analysis for a particular product, process or service under cost sheets, understanding the type of cost sheets and the format in which they are prepare for a period, say weekly, monthly, yearly or for a specific purpose say tender prices. What is cost sheet? A cost sheet is a statement stating components of total cost of a product.

It may be prepared on historical basis or estimated basis.

What is historical cost sheet? It is a cost sheet which is prepared after actual cost are incurred while estimated cost sheets are those cost sheets which are prepared before production commences. They are based on estimates, example of such estimated cost sheet is tender price costing where we estimate the cost of a tender and furnish the stipulated price.

2. INFORMATIONS FURNISH BY COST SHEET

Students, now we will learn what are the information furnish by a cost sheet? A cost sheet furnishes information about total cost, components of total cost that is its bifurcation into prime cost, factory cost, cost of production, cost of goods sold, then cost per unit is ascertained that can

be for total product or for each segment of cost. Previous years figures are budgeted figures or standard cost figures are also furnished for the purpose of comparisons. Lastly there are certain informations which are required as per requirement of business. They are also furnished additionally like nature of the product, cost center, cost units name, then output of the period, period to which the cost sheet is related, details of various components of cost, item wise cost per unit, changes in the stock position, cost of goods sold detail and finally profit and loss position. What is the utility of cost sheet? Why it is important? Lets learn about it. It is useful because it helps in firstly cost ascertainment; the main objective of cost sheet is the ascertainment of total cost. Secondly, fixing of selling price, when cost is ascertained and analysis, our aim is to find out selling price of a particular product which can be find out by adding a percentage of profit either on cost or sales so that selling price can be fixed, the selling price is required either as for a tender or for any future product. Helpful in cost control, for controlling cost of a product, we prepare cost sheets, there are previous years figures available in cost sheets by which we can compare the data and find out the deviations. Fourthly, it helps in management decisions. How it helps in management decisions? When we prepare a cost sheet, we can take a decision whether to buy a component or to manufacture it or we have to go for a replacement of machine or we have to continue with the machine.

3. COMPONENTS OF COST SHEET

Now we will learn about the components of cost sheet. The component of cost sheet are the elements of total cost, that is how total cost is divided as per the functionality as in the cost classification, we learn that cost can be classified as per their functions, so here in the cost sheet; we classify the cost as per their functionality. The first cost is called prime cost. Its other name is flat cost, direct cost or first cost.

It is accumulation of direct material,

direct labor and direct expenses. Direct material means all those things which are directly traceable to a product that is which are identifiable directly, for example wood used for a chair or an radio or engine is used in an automobile, then direct labor, direct labor means efforts of those persons have been applied on making that particular product, that is called a direct labor. For example, in an automobile industry, somebody who has assembled the product so whatever wages had been paid to a assembly man is called direct labor. Then comes, direct expenses, they are all manufacturing expenses other than direct material and direct labor. We can exemplified it as if we have purchase some special machine for the production of a particular product, the cost incurred for hiring that special machine will be considered as our direct expenses. So our prime cost comprises direct material, direct labor and direct

overhead. Very important thing comes under prime cost that is raw material, when we use raw material, we do not use it totally into the production. For a period, there can be opening stock and there can be closing stock, so we need to find out how much actually the raw material has been consumed, so we will find out raw material consumed by the following formula. Opening stock of raw material + raw material purchased for the period closing stock of raw material = raw material consumed

second component is factory cost. It is also known as works cost or manufacturing cost. Factory cost is accumulation of all indirect material or indirect labor or indirect expenses.

Total factory cost = Prime cost + Factory overheads

Indirect material means which is not directly used in the manufacture of a product or service but it is ancillary. Its very small in amount either like oil, Greece or clips used in manufacturing of a product. Then indirect labor, they helps in the manufacturing process, they dont apply their efforts directly into the manufacturing of a product or service. Like supervisor, foreman salary, then indirect expenses means they are ancillary expenses to carry on the manufacturing process. Now what are

factory overheads? Factory overheads are those expenses which are necessary for production process but they are in the nature of indirect expense. Examples are,

rent of the premises in which manufacturing is going on, rates, taxes of factory, depreciation of fixed assets, excise duty, canteen expenses and labor welfare expenses. So we have got till now prime cost plus all this overheads related to factory expenses, it gives us the total factory cost, ( Total factory cost = Prime cost + Factory overheads ) what happens as in the case of raw material, there remains opening and closing stock, similarly certain units are not manufactured totally, so there remain unfinished units, they are called work in progress, so we need to make an adjustment in the factory cost for work in progress.

We need to add opening work in progress units, less closing work in progress. So we find out factory cost in net. When we move ahead, it now comes cost of production, cost of production can be ascertained by adding office and administrative expenses to the factory cost so determined.
( Factory cost + Office and administrative expenses = Cost of Production)

What are office and administrative expenses? They are such expenses which need to be incurred for carrying out daily business activities.

Now let us see the example of office and administrative expenses.

These are salaries of administrative staff, office rent, taxes of administrative accommodation, postage, telegram, stationary, lighting of administrative buildings, depreciation of office appliances, so this constitute our cost of production. Now moving ahead, we will find out cost of goods sold. When we make adjustment, in cost of goods sold, for opening finished goods and closing finish goods, we can ascertain cost of goods sold.

Say for example,

total cost of production has come out Rs. 1,22,000, now if I add opening stock of finish goods of 12,000 into it and subtract closing stock of finish goods of 16,000 from it, I will get the cost of goods sold as Rs. 1,18,000, so this way I will ascertain cost of goods sold. Now when I add selling and distribution expenses to this cost, I will ascertain the total cost, now what are selling and distribution expenses? They are such expenses which are incurred for creating demand or stimulating demand.

They are travelers commission,

advertisements, rents, rates, taxes of sales office, depreciation of sales office appliances, cost of participation in industrial fairs and exhibition, cost of free gifts, cost of free after sales services and normal bad debts. Now there are certain distribution expenses, which I have covered in selling and distribution itself.

They are delivery van expenses,

freight insurance, packing for delivery loading and unloading, salary of the delivery man and finally customs duty. So this will constitute my total cost. If I load percentage of profit into it, I will get the sales.

4. INTER RELATION OF EACH AND EVERY COMPONENT

Students lets capsulize what we have learn in cost sheet, that is inter relation of each and every component. Firstly we will find prime cost; Prime cost = Direct material + Direct labor + Direct expenses When factory overheads are added to prime cost, it is coming as factory cost. ( Factory cost = Prime cost + Factory overheads)

Factory cost plus office administrative expenses, it is coming as cost of production. ( Cost of production = Factory cost + Office administrative expenses) Cost of production, if I add to it, selling and distribution expenses, my total cost comes, ( Total cost = Cost of production + Selling and distribution expenses) if I load profit percentage into it, it will give me sales figure. ( Sales = Total cost + Profit percentage) So this is what we call as a cost sheet format. This is a very simple cost sheet format. There are other cost sheet formats also which we learn gradually. Now let us learn it with figures, my direct material amounts

to Rs. 1,60,000, direct labor amounts to 45,000, factory overheads are 35,000, direct expenses are 15,000, and generally when I find out factory overheads, I can use blanket rate for the absorption of overhead

expenses, related to office and administration. When other figures are also given, so lets move and work on it, firstly I have to find out prime cost. So I will add direct material,

direct labor and direct expenses. Direct material is 1,60,000, direct labor 45,000 and direct expenses 15,000. Summing up, I am getting the prime cost of Rs. 2,20,000. My factory overheads are also given, they are 35,000. If I add 35,000, factory overheads to the prime cost, I will ascertain factory cost, which will amount to 2,55,000. Now my question is you have to find out office and administrative overheads as 20 % of work cost.

So what I have find out as work cost is 2,55,000, if I apply the percentage that is 20 % or factory cost, it comes out to 51,000. So my office and administrative expenses are 51,000, adding to factory cost, I will get cost of production which amounts to 3,06,000. Now I need to make adjustment of opening stock of finished goods and closing stock of finish goods in the cost of production, so that I can get the cost of goods sold. My opening stock of finished goods are 25,000, lets closing stock of finished goods 10,000. So my cost of goods sold is coming to 3,21,000. Now selling and distribution expenses as given in the question is 45,000. It comprises my total cost now, which amounts to 3,66,000. In this way,

we have ascertained total cost by classifying and analyzing the cost as per their functions and in the prescribed format of cost sheet.

5. OTHER FORMS OF COST SHEET

Dear students, till now we have learn simple cost sheet format, now lets learn other forms of cost sheet. This is called reverse working cost sheet

where some information is missing while other relevant informations are provided. So we need to use other information to find out the missing information. We have to move in a reverse chronology. Like missing information is cost of raw material purchased and given information is cost of goods sold and opening and closing stock. So adjusting opening and closing stock in the cost of goods sold, we can ascertain cost of raw material purchased using the same formula by which we can find out cost

of goods sold. We just need to reverse the formula. Now second comes problems based on estimated cost sheets. Under this, cost sheet is prepared on the estimated basis where we will firstly find out actual cost, then we will apply the estimations, we will segregate variable cost, fixed cost and semi variable cost. We allow variable cost are those cost which changes with the change in level of output while fixed cost

remains fixed up to a certain level of output and semi variable cost are, they are called as semi fixed cost which we need to ascertain by applying a formula.

Next comes, problems where break up of semi variable costs are not given. So in that case there are certain formulas like high low formula, change in output level formula, by which we can find out variable cost element, then subtracting variable cost from semi variable cost, we can find out fix cost and in that way, our cost sheet format completes up, when we ascertain all the elements like what are fixed elements, what are variable elements and then complete our cost sheet. And last one is based on total cost ratios. These are the sort of cost sheets format which we have to apply when we solve our cost sheet problems. Summing up todays lecture, we will capsulate what we have learned that is today we have learned meaning of cost sheet, its utility, need of preparing a cost

sheet, time of preparing a cost sheet, that is weekly, yearly, monthly and classifying the cost for ascertaining total cost of output and various formats of cost sheet. With this, we are ending up our todays lecture. Thank you.