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Chapter 1: Cost Sheet

M/s. XYZ Ltd.
Cost Sheet for the year ending 31st March 2009
Production: #### Units
Particulars Amount Amount Cost P.U.
Raw Materials Consumed: Rs. Rs. Rs.
Opening Stock of Raw Material ***
Add: Purchase of Raw materials ***
Add: Purchase Expenses ***
***
Less: Purchase Returns ***
Less: Abnormal Loss of Raw Materials ***
Less: Closing stock of Raw Materials *** *** ***
Direct Wages (Productive Labour) *** ***
Direct Expenses (Chargeable Expenses) *** ***
Royalty *** ***
*** ***
Adjustment for WIP at Prime Cost:
Opening Stock of WIP ***
Less: Closing Stock of WIP *** *** ***
PRIME COST *** ***
Add : Factory Overheads:
Factory Rent, Power ***
Indirect Material ***
Indirect Wages ***
Supervisor Salary ***
Factory Asset Depreciation ***
Note 3
***
Less: Sale of Scrap *** *** ***

Adjustment for WIP at Manufacturing Cost:

Opening Stock of WIP ***
Less: Closing Stock of WIP *** *** ***
WORKS COST *** ***
Add: Administration Overheads:
Office Rent ***
Office Asset Depreciation ***
Audit Fees ***
Bank Charges ***
Other Office Expenses *** *** ***
COST OF PRODUCTION *** ***
Adjustment for Stock of Finished Goods:
Opening stock of Finished Goods ***
Less: Closing stock of Finished Goods ( Note 2) *** *** ---
COST OF GOODS SOLD *** ***
Add: Selling and Distribution Overheads:
Salesman Commission, salary, etc. ***
Traveling Expenses ***
Advertisement ***
Delivery-man expenses *** Note 4
Sales Tax ***
Bad Debts *** *** ***
COST OF SALES *** ***
PROFIT (balancing figure) *** ***
SALES *** ***

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Working Notes:
1. Opening Stock + Units Produced = Units Sold + Closing Stock
2. Valuation of Closing Stock of Finished Goods:
¾ FIFO Basis:
Value of Closing Stock of Finished Goods = Cost of Production X Units of Closing Stock
Units Produced
¾ LIFO Basis:
Closing Stock of Finished Goods
Opening Stock of Finished Goods Out of Current Production
( Value Given in Question) Cost of Production X Units
Units Produced

3. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units
Produced.
4. Cost per Unit for this part is to be calculated by dividing the Amounts in 2nd column by Units Sold
5. Items not to be considered in Cost Sheet:
(i) Income Tax (vi) Interest
(ii) Cash Discount (vii) Rents receivable.
(iii) Donations, Dividend (viii) Losses on the sales of investments,
(iv) Preliminary Expenses/ Goodwill building etc.
written off. (ix) Profits made on the sale of fixed assets.
(v) Transfer to reserves. (x) Transfer fee received.

Elements of Cost:
ƒ Cost: Cost is measurement, in monetary terms, of the amount of resources used for the purpose of
production of goods or rendering services. The amount of expenditure (actual or notional) incurred on
or attributable to a specified article, product or activity.
ƒ Direct costs: Costs that are related to the cost object and can be traced in an economically feasible way.
ƒ Indirect costs: Costs that are related to the cost object but cannot be traced to it in an economically
feasible way.
ƒ Cost object – Anything for which a separate measurement of cost is desired. Examples of cost objects
include a product, a service, a project, a customer, a brand category, an activity, a department, a
programme.

A diagram as given below shows the elements of cost described as under:

ELEMENTS OF COST

MATERIALS COST LABOUR COST OTHER EXPENSES

DIRECT INDIRECT DIRECT INDIRECT DIRECT INDIRECT

MATERIALS MATERIALS LABOUR LABOUR EXPENSES EXPENSES
COST COST COST COST

OVERHEADS

PRODUCTION OR OFFICE & ADMINISTRATION SELLING DISTRIBUTION

WORKS OVERHEAD OVERHEAD OVERHEAD OVERHEAD

ƒ Direct materials: Materials which are present in the finished product (cost object) or can be
economically identified in the product are called direct materials. For example, cloth in dress making;
materials purchased for a specific job etc. (Note: However in some cases a material may be direct but it
is treated as indirect, because it is used in small quantities and it is not economically feasible to identify
that quantity.)

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ƒ Direct labour: Labour which can be economically identified or attributed wholly to a cost object is
called direct labour. For example, labour engaged on the actual production of the product or in carrying
out the necessary operations for converting the raw materials into finished product.
ƒ Direct expenses: It includes all expenses other than direct material or direct labour which are specially
incurred for a particular cost object and can be identified in an economically feasible way.
ƒ Indirect materials: Materials which do not normally form part of the finished product (cost object) are
known as indirect materials. These are: Stores used for maintaining machines and buildings (lubricants,
cotton waste, bricks, Stores used by service departments like power house, boiler house, canteen etc.
ƒ Indirect labour : Labour costs which cannot be allocated but can be apportioned to or absorbed by cost
units or cost centres is known as indirect labour. Examples of indirect labour includes - charge hands
and supervisors; maintenance workers; etc.
ƒ Indirect expenses: Expenses other than direct expenses are known as indirect expenses. Factory rent
and rates, insurance of plant and machinery, power, light, heating, repairing, telephone etc., are some
examples of indirect expenses.
ƒ Overheads: It is the aggregate of indirect material costs, indirect labour costs and indirect expenses.
The main groups into which overheads may be subdivided are the following :
(i) Production or Works overheads: Indirect expenses incurred in the factory and are incurred with
the running of the factory.
(ii) Office & Administration Overhead: Indirect expenses incurred in the direction, control and
administration of an undertaking.
(iii) Selling overhead: Indirect expenses incurred in the soliciting and securing orders from
customers and of efforts to find and retain customers.
(iv) Distribution overhead: Indirect expenses incurred from the time the product is completed in the
factory until it reaches its point of sale.

COST

DIRECT INDIRECT

MATERIAL LABOUR EXPENSES MATERIAL LABOUR EXPENSES

PRIME COST OVERHEAD

FACTORY OFFICE & ADMINISTRATION SELLING DISTRIBUTION

OVERHEAD OVERHEAD OVERHEAD OVERHEAD

COST

ƒ Cost Centre: It is defined as a location, person or an item of equipment (or group of these) for which
cost may be ascertained and used for the purpose of Cost Control. Cost Centres are of two types, viz.,
Personal and Impersonal. A Personal cost centre consists of a person or group of persons and an
Impersonal cost centre consists of a location or an item of equipment (or group of these).
ƒ Cost unit: It is a unit of product, service or time (or combination of these) in relation to which costs
may be ascertained or expressed. We may for instance determine the cost per tonne of steel, per tonne
kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract
constitutes a cost unit.
ƒ Cost Accounting is defined as "the process of accounting for cost which begins with the recording of
income and expenditure or the bases on which they are calculated and ends with the preparation of
periodical statements and reports for ascertaining and controlling costs."
ƒ Objectives of Cost Accounting
The main objectives of Cost Accounting are as follows:
(i) Determination of selling price.
(ii) Ascertainment of cost.
(iii) Ascertaining the profit of each activity.
(iv) Assisting management in decision-making.
(v) Cost control and cost reduction.
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ƒ Advantages of a Cost Accounting are listed as below :

(i) A good Cost Accounting System helps in identifying unprofitable activities, losses or
inefficiencies in any form.
(ii) The application of cost reduction techniques, operations research techniques and value analysis
technique helps in achieving the objective of economy in concern’s operations. Continuous
efforts are being made by the business organisation for finding new and improved methods for
reducing costs.
ƒ Concept of cost sheet
A cost sheet is a statement showing components of total cost of output of a particular product or service
produced during a particular period. It is useful in the following ways:
(i) It helps us to know different components of total costs.
(ii) It acts as a budgetary statement.

Concept of cost accounting and financial accounting

Financial Accounting Cost accounting
The objective is to provide information about The objective is to ascertain cost, control cost and
overall financial performance and financial to provide information for decision making.
position of business.
It is kept by all types of concerns including trading It is kept by businesses engaged either in
concerns. manufacturing or in rendering services.
It shows the profit or loss of the business as a It shows the profit or loss of each product, job,
whole. process or department.

Write answer of these questions in your copy:

1. Distinguish between:
a. Cost Centre & Cost Unit [ISC 2005]
b. Fixed Cost & Variable Cost.
c. Cost Accounting & Financial Accounting
d. Chargeable Expenses & Overhead Expenses
e. Cost sheet & Profit & Loss Account.
f. Prime Cost & Work Cost. [ISC 1996]
g. Primary packing material & Secondary packing material
2. Mention two uses of cost sheet. [ISC 1999]
3. How is material consumed calculated? [ISC 2000]
4. Define Costing. [ISC 2003]
5. How is stock of finished goods valued during the preparation of cost sheet? [ISC 2002]
6. What is Work in Progress?
7. What is Production Supplies?
8. What is Consumable Stores?
9. What is treatment of sale of scrap?
10. What is Direct Cost? [ISC 1995]
11. Give two reasons why profits disclosed by cost sheet differ from those of financial accounts.
[ISC 1998]
12. Mention the expenses not includible in Cost sheet. [ISC 2004]
13. What is Prime Cost? [ISC 1993]
14. Name four Types of Direct Expenses. [ISC 2007]
15. What is: (a) Cost accounting; (b) Financial accounting? [ISC 2008]

Student’s Notes

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