WHAT IS A COST STATEMENT

A document that reflects the cost of the items and services required by a

particular project or department for the performance of its business purposes

For example, a departmental cost sheet might include the material costs, labour

costs and overhead costs incurred over a given time frame by a department and it
therefore provides a record of costs that are chargeable to that department
As businesses take on new projects and run their day-to-day operations, they need to track how
much they spend along the way.
A cost statement or cost sheet provides management a document that details the costs of
conducting a project, running a department or manufacturing a product in terms of goods and
services.
Most cost sheets contain a minimum of three primary sections labelled direct materials, direct
labour and overhead. Some cost sheets include sections such as indirect labour, which covers
support staff, and indirect materials, which represent a negligible expense.

STATEMENT OF A MANUFACTURING
 Manufacturing company is the company that focus on using labour and/or machinery to
convert raw materials into marketable products, while merchandising company is a
commercial enterprise dedicated to the purchase of finished goods and their resale for a
profit.
 A merchandising business will generally buy their products from a wide range of
distributors domestically and internationally and market their products in huge consumer
shopping facilities.

THE COST OF GOODS MANUFACTURED STATEMENT

The purpose of the cost of goods manufactured statement is to compute the cost of goods
completed or finished in a given time period.
The cost of goods manufactured is the cost of goods finished this period. Cost of goods
manufactured consists of three basic cost elements: (1) materials, (2) factory labour, and (3)
manufacturing overhead. Materials used are a computation:
Direct material means cost of raw material used or consumed in production. It is not necessary
that all the material purchased in a particular period is used in production. There is some stock of
raw material in balance at opening and closing of the period. Hence, it is necessary that the cost
of opening and closing stock of material is adjusted in the material purchased. Opening stock of
material is added and closing stock of raw material is deducted in the material purchased and we
get material consumed or used in production of a product
Adjustment for stock of work-in-progress
In the process of production, some units remain to be completed at the end of a period. These
incomplete units are known as work-in-progress. Normally, the cost of incomplete units includes
direct material, direct Labour, direct expenses, and average factory overheads. Hence, at the time
of computing factory cost, it is necessary to make adjustment of opening and closing stock of
work in progress to arrive at the net Factory cost/works cost.

Example 1
1 January 20X7, Stock of raw materials 8,000
31 December 20X7, Stock of raw materials 10,500
1 January 20X7, Work in progress 3,500
31 December 20X7, Work in progress 4,200

Year to 31 December 20X7:

Wages: Direct 39,600
Indirect 25,500
Purchase of raw materials 87,000
Fuel and power 9,900
Direct expenses 1,400
Lubricants 3,000
Carriage inwards on raw materials 2,000
Rent of factory 7,200
Depreciation of factory plant and machinery 4,200
Internal transport expenses 1,800
Insurance of factory buildings and plant 1,500
General factory expenses 3,300

Required
a) Find the Production cost of goods completed / the cost of goods manufactured
 b) also there had been £3,500 stock of finished goods at 1 January 20X7 and £4,400 at 31
December 20X7, and the sales of finished goods amounted to £250,000 then prepare the
trading account /manufacturing account

Example 2
The following figures are taken from the books of a manufacturing company for the year ended
on March 31, 2017. Prepare a cost sheet showing clearly the prime cost, production cost, total
cost (statement of cost of production) and profit obtained

Details this Details THz

Direct material 2,500,000 Branch office expenses 30,000
Direct labour 800,000 Depreciation of office building 10,000
Depreciation of factory Deprecation of staff cars 15,000
building 16,000 Electricity (including tshs 5,000)
Insurance: for administrative office) 35,000
Staff cars 2,000 Advertisement 18,000
Office building 1,500 Sundry factory expense 420,000
Factory building 2,000 Sales promotion 4,000
Delivery van-maintenance Office administration expenses 60,000
and running expenses 12,000 Expenses for participating in
Salaries (including that of industrial exhibition 8,000
sales manager tshs 20,000
and factory chief engineer Sales (10,000 units)
tshs 25,000) 275,000 Units produced (10,000)
Finished goods warehouse Price 500/unit
expenses 15,000

Formula
 Cost of Goods Manufactured Statement
 Material used = materials (beginning) + material purchases - materials inventory (ending)
 Cost of goods manufactured = materials used + factory labour + manufacturing overhead
+ work in process (beginning) - work in process (ending)
 Income statement
 Cost of goods sold = finished goods (beginning) + cost of goods manufactured - finished
goods (ending)
 Overhead = Indirect material + Indirect labour + Indirect expenses
DIRECT COSTS AND INDIRECT COSTS

Manufacturing costs may be classified as direct costs and indirect costs on the basis of whether
they can be attributed to the production of specific goods, services, departments or not.

Direct Costs

Direct costs can be defined as costs which can be accurately traced to a cost object with little
effort. Cost object may be a product, a department, a project, etc. Direct costs typically benefit a
single cost object therefore the classification of any cost either as direct or indirect is done by
taking the cost object into perspective. A particular cost may be direct cost for one cost object
but indirect cost for another cost object.

Most direct costs are variable but this may not always be the case. For example, the salary of a
supervisor for a month who has only supervised the construction of a single building is a direct
fixed cost incurred on the building.

Indirect Costs

Costs which cannot be accurately attributed to specific cost objects are called indirect costs.
These typically benefit multiple cost objects and it is impracticable to accurately trace them to
individual products, activities or departments etc.

Examples: Cost of depreciation, insurance, power, salaries of supervisors incurred in a concrete

plant.

Example

Following costs are incurred by a factory on the production of identical cupboards:

1. Labourers’ wages 2. Synthetic wood

3. Power consumption 4. Glass
5. Nails and screws 6. Factory insurance
7. Handles, locks and hinges 8. Wood
9. Supervisors' salaries 10. Factory depreciation
11. Varnish, glue, paints 12. Factory manager's salary

CONTROL OF COST
One of the most important features of cost accounting is its use for control purposes, meaning, in
this context, the control of expenditure. But control of expenditure is possible only if you can
trace the costs down to the employees who are responsible for such costs

COST CENTER

A cost center is a business unit that is only responsible for the costs that it incurs. The manager
of a cost center is not responsible for revenue generation or asset usage. The performance of a
cost center is usually evaluated through the comparison of budgeted to actual costs. The costs
incurred by a cost center may be aggregated into a cost pool and allocated to other business units,
if the cost center performs services for the other business units.

Cost Centre is a location, person or item of equipment for which cost may be ascertained and
used for the purpose of cost control

Cost centre is any unit of the organization to which costs can be separately attributed.

Examples of cost centers are as follows:

 Accounting department
 Human resources department
 IT department
 Maintenance department
 Research & development

COST UNIT

Cost unit is that unit of measurement which is helpful to classify the cost and measure the cost of
products and services. Before measuring the cost, we should determine the cost unit. It should be
different according the nature of products and nature of business. You normally see, the vendor
of medicine will sell you the medicine in the form of batch of 12 or 20 tablets.

A cost unit is a unit of a product or a service to which costs can be traced.

For example, for a manufacturer of laptop computers, a cost unit would be a laptop. For a bus
company, a cost unit could be a bus journey.

PROFIT CENTER

A profit center is a business unit or department within an organization that generates revenues
and profits or losses. Management closely monitors the results of profit centers, since these
entities are the key drivers of the total results of the parent entity. The manager of a profit center
usually has the authority to make decisions regarding how to earn revenue, and which expenses
to incur.
Managers of profit centers are evaluated on their ability to control costs as well their ability to
generate revenue and profits (revenues - expenses) in their departments

INVESTMENT CENTRE

An investment centre is a place where costs, revenues and capital investment are identified.

Because costs, revenue and capital expenditure all have to be identified separately an investment
centre would normally be:

 A subsidiary company
 A division

The head of an investment centre will be responsible for costs revenues and capital expenditure.
In effect, that person has responsibility for all financial aspects of the investment centre.