COST SHEET Cost sheet or cost statement is a statement which is prepared usually to present the detailed costs of total

output during the period in question. It is not based on a double-entry framework. It provides information relating to cost per unit at different stages of the total cost of production or at different stages of completion of the product. According to CIMA,London cost sheet is a . document which provides for the assembly of the estimated detailed cost in respect of a cost centre or a cost unit". It analyses and classifies in a tabular form the expenses on different items for a particular period.

Importance of Cost Sheet

A cost sheet helps both in ascertainment and control of costs. It also provides data on the basis of which the selling prices of the products can be fixed. Thus, a cost sheet performs the following functions. a) Ascertainment of cost : A cost sheet helps in ascertainment of total cost, cost per unit at different stages of production. The information provided by the cost sheet helps the management in taking various decisions, to make pr buy a product, to sell or not to sell in a foreign market, to process a product completely in the factory or to purchase in a semifinished form from outsiders, etc.

b) Controlling Costs: A cost sheet presents the cost data for two or more periods in a comparative form. Such a presentation helps in identifying the elements whose costs have gone up and where control is required. c) Fixation of Selling Price: A cost sheet provides data about the cost of a job, product or process. The business can fix appropriate selling prices for its products on the basis of such data. d) Submitting of Tenders: Costs have to be ascertained for submitting of tenders, giving price quotations, etc.Preparation of an estimated cost sheet about the relevant product or job considerably facilitates this work.

ELEMENTS OF COST There are three broad elements of cost. They are 1) Material: The substance from which the product is made is known as material. It may be in raw, semi-manufactured or a manufactured state. It can be direct as well as indirect. a) Direct Material : All material which becomes an integral part of the finished product and which can be conveniently assigned to specific physical units is termed as Direct Material e.g.: Primary packing material, purchased or partly produced components. Direct material is also described as process material, prime cost material, production material, stores material, construction material, etc

b) Indirect Material: All materials which is used for purpose ancillary to the business and which cannot be conveniently assigned to specific physical units is termed as Indirect Material.egs Consumable stores , oil and waste, printing and stationery material, etc. Indirect material may be used in the factory, the office or the selling and distribution divisions. 2) Labour: For conversion of materials into finished goods, human effort is needed, such human effort is called labour.Labour can be direct as well as indirect. a) Direct Labour: Labour which takes an active and direct part in the production of particular commodity is called direct labour.

Direct labour is also described as process labour, productive labour, operating labour etc. b) Indirect Labour: Labour employed for the purpose of carrying out tasks incidental to goods or services provided is indirect labour.Such labour does not alter the construction , composition or condition of the product. Eg:Wages of store-keeper, foremen, time-keepers, directors fees 3) Expenses: Any other cost besides material and labour is termed as expense. Expense may be direct or indirect.

a)

Direct Expense: These are expenses which can be directly, conveniently and wholly allocated to specific cost centres or cost units.Eg,s of such expenses are hire of some special machinery required for a particular contract, cost of defective work incurred in connection with a particular job or contract, etc. Direct expenses are sometimes also described as chargeable expenses. b) Indirect Expense: These are expenses which cannot be directly, conveniently and wholly allocated to cost centres or cost units. Eg; Rent, rates, insurance, salaries etc.

Overhead: The term overhead includes indirect material, indirect labour and indirect expenses. Thus all costs are overheads. A manufacturing organization can broadly be divided into three divisions. a) Factory or Works where production is done. b) Office and Administration, where routine as well as policy matters are decided. c) Selling and Distribution where products are sold and finally despatched to the customer.

Overheads may be incurred in the factory or office or selling and distribution divisions. Thus overheads may be of three types 1) Factory Overheads: They include a) Indirect material used in the factory such as lubricants, oil, consumable stores etc b) Indirect labour such as gate-keepers salary, time-keepers salary , works managers salary, etc. c) Indirect expenses such as rent, insurance, lighting.

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3)

Office and Administration Overheads: They include a) Indirect material used in the office such as printing and stationery material, brooms and dusters etc. b) Indirect labour such as salaries payable to office manager, office accountant, clerks, etc. c) Indirect expenses such as rent, insurance, lighting of the office. Selling and Distribution Overheads: They include a) Indirect material used such as packing material, printing and stationery material, etc. b) Indirect labour such as salaries of salesmen and sales manager, etc.

c) Indirect expenses such as rent, insurance, advertising expenses, etc.

COMPONENTS OF TOTAL COST A component of cost comprises of two or more elements. The various components of total cost are as follows. 1) Prime Cost: It consists of cost of direct material, direct labour, and direct expenses. It is also known as basic, first or flat cost. Prime Cost = Direct Material + Direct Labour + Direct Expense

Adjustment for Raw Material Stock The term Direct Material refers to the cost of direct materials consumed. It is not necessary that all materials purchased during a period are also consumed during the same period. Some materials may remain in stock. Hence cost of materials consumed will have to be ascertained by making appropriate adjustments for opening and closing stock of materials. 2) Factory Cost: It comprises of prime cost plus works or factory overheads. The cost is also known as Works Cost, Production or Manufacturing Cost. Factory Cost = Prime Cost + Factory Overheads

Adjustment for Scrap Scrap is the incidental residue from certain types of manufacturing operations usually of small amount and low value; recoverable without further processing. The amount realised from sale of scrap should be deducted either from works overheads or gross works cost. Adjustment for Work-in-progress Work-in-progress means units which are not yet complete but on which some work has been done. Thus it represents goods which are in the process of manufacturing.

 In the following circumstances purely on financial consideration works overheads may not be included while valuing work-in-progress a) In case certain manufacturing departments are not in a position to bear their full share of overhead cost, they will not be charged with their full share of overheads. b) Factory overheads are also not taken into account if the goods are produced for highly sensitive or competitive market (eg:fashion goods). The demand of such goods may come down any moment and therefore, they may have to be sold at even at prime cost.

c) In case of building contracts, in order to have a margin for contingencies, overheads may not be considered while valuing uncertified work-in-progress. d) Where stocks have to be held for a long period for maturing, usually overhead expenses are not added because the ultimate selling price may or may not be adequate for the purpose. e) Where levels of production and sales are subject to material fluctuations, overheads are not added to cost of work-in progress.

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Office Cost: If office and administrative overheads are added to factory cost, office cost is arrived at. This is also termed as administrative cost or cost of production. Adjustment for Finished Goods In the cost of production relating to a particular commodity or unit of production, the opening stock of finished goods is added and closing stock subtracted to find out the cost of goods sold. Stock of finished goods is generally valued at the total cost of production.

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Total Cost or Cost of Sales: Total Cost is ascertained by adding selling and distribution overheads to Cost of Production of goods sold. Cost of Sales Cost of Production or = of Total Cost goods sold Selling and Distribution Overheads