HOW TO PREPARE COST SHEETS AND ANALYSE COSTS

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763

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 WHAT IS A COST SHEET?
It is a simple method to depict cost. It is based
on the principles of cost accounting. We put
costs in different categories and put it in a cost
sheet. Typical cost sheet is divided in 4 parts :
1. Total direct cost or prime cost 2. Prime cost
+ factory cost = works cost 3. Works cost +
admn. Exp + stock adjustment= Cost of
production 4. cost of production+sales exp=
cost of sales + profit =sales
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 Prepare cost sheet from the
following:

Direct material = 10, direct labour = 10 direct

exp = 5, factory expenses = 5, administrative
expenses = 5 Opening stock = 3, closing stock
= 8, selling expenditure = 5, sales = 90

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 solution...
Direct material + direct labour + direct
expenses = Prime cost = (10+10+5) = 25
Prime cost + factory cost = works cost
=25+ 5 = 30
add administrative. Exp + 5 = 35, adust for
stock : less closing stock and add opening
stock = - 5= 30 cost of production
add selling exp : 5 = 35 cost of sales
sales = 50, profit = 50—35 = 15. answer
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A company produces X,Y,Z for which standard
variable costs are as under, fixed overhead is
5400000 for each month. Inspite of increased
sale, profit for 2nd month has fallen. Why ?

direct material  60 120 160

direct wages  80 80 200
variable overhead 60 100 140
selling price  360 500 960

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 solution...

Contribution per unit :

X = (360 – (60+80+60) ) = 160
Y = 500- (120+80+100) = 200
Z= 960 – (160+200+140) = 460
thus profit in the month of Nov. Was :
(160*2 + 200*2*460*2) = 1640 – 54 lakh
dec : (160*4+200*2.6+460*1)=1620 – 54 lakh
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 Explanation
If we look at total volume, sales has increased,
but if we look at profit, it is 20 lakhs lower in
next month. The reason is that increase in sale
is mostly in X and there is decrease in sale of
Z. Z contributes substantially to profit, but
when its sale is declining profit is bound to fall.
Z alone contributes 56% of total contribution.
So the conclusion is that the company must
pay attention to sale of Z to earn more.
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A company manufactures a product utilising 80% capacity
with a turnover ofRs 8 lakhs @25 per unit. Material cost :
7.5 p.u., labour : 6.2 p.u., semivariable cost including
variable (@3.75 p.u): 1.8 lakhs, fixed .9 lakh upto 80%,
thereafter 20000 more will be required. Find sale to earn 1
lakh.

Contribution : 25- (7.5+6.2+3.75) = 7.5

let us find profits at different levels :
formula : contribution – fixed cost = profit
sale = Rs. 8 lakh / 25 = .32 lakh unit
80%: (.32* 7.5) - (.9+(1.8-(.32*3.75))
=.9
but our goal is to earn 1 lakh..

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 continued...
Let us try at 100% capacity :
(.4* 7.5) - (.9+.2+(1.8-(.4*3.75))
=3 – 1.4
=1.6, so it it more than our target profit.
(X* 7.5) - (.9+.2+(1.8-(X*3.75)) = 1
7.5x+3.75X – 2.9 = 1
11.25X=3.9
X = 3.9/11.25 = .34
Thus comapny should make 34000 units to earn 1 lakh of profit.

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 What should be the selling price
per unit, if BEP is to be reduced to
40% level?
Contribution – fixed cost = profit (at BEP level, profit is ZERO)
(.16* X) - (.9+(1.8-(.16*3.75))=0
.16X-2.1=0
X= 2.1/.16 = 13.1
contribution must be 13.1, for this selling price has to be :
selling price = (contribution + variable cost per unit)
=(13.1+ 17.5) = 30.6 answer

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