Preparation of cost sheet

Cost sheet
It is a document which provides the assembly of the estimated detail cost in cost center & cost unit . It is the detail statement of elements of cost arranged in a logical order under different heads. It is prepared to show detail cost of the total output for a certain period.

Elements of cost.
There are broadly three elements of cost. Materials Labour Other expenses

Materials
The substance from which the product is made is known as material. It may be in a raw or a manufactured state. It can be direct as well as indirect. 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. The following are some of the examples of direct material: All material or components specifically purchased, produced or requisitioned from stores. Primary packing material (e.g., carton, wrapping, cardboard, boxes, etc.) Partly produced or purchased components.

 Indirect Material: All material which is used for purposes ancillary to the business and which cannot conveniently be assigned to specific physical units, is termed as indirect material. Ex -Consumable stores, oil etc.

Labour
For conversion of materials into finished goods, human effort is needed, such human efforts is called labour. It can be direct as well as indirect. Direct Labour: Labour, which takes an active and direct part in the production of a particular commodity, is called direct labour. Direct labour costs are, therefore, specifically and conveniently traceable to specific products.

 Indirect Labour: Labour employed for the purpose of carrying out tasks incidental to goods produced or services provided is indirect labour. Such labour does not alter the construction, composition or condition of the product. It cannot be practically traced to specific units of output. Wages of store-keepers, foremen, time-keepers, director fees, salaries of salesmen, etc., are all examples of indirect labour costs

Other expenses
Expenses may be direct or indirect Direct Expenses: these are expenses, which can be directly, conveniently and wholly allocated to specific cost centers or cost units. Examples 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. Indirect Expenses: These are expenses which cannot be directly, conveniently and wholly allocated to cost centers or cost units. Examples of such expenses are rent, lighting, insurance charges, etc.

Overheads
The term overhead includes indirect material, indirect labour and indirect expenses. Thus, all indirect costs are overheads. A manufacturing organization can broadly be divided into three divisions. Factory or Works, where production is done. Office and administration, where routine as well as policy matters are decided. Selling and distribution, where products are sold and finally despatched to the customers. Overheads may be incurred in the factory or office or selling and distribution divisions.

Types of overhead
Overheads may be of three types. Factory overheads Office and administration overheads Selling and distribution overheads

Factory Overheads
It includes: Indirect material used in the factory such as lubricants, oil, consumable stores. Etc. Indirect labour such as gatekeepers salary, works managers salary, etc. Indirect expenses such as factory rent, factory insurance, factory lighting, etc.

Office and administration overheads

It includes: Indirect material used in the office such as printing and stationery material. Indirect labour such as salaries payable to office manager, office accountant, clerks, etc. Indirect expenses such as rent, insurance, lighting of the office.

Selling and Distribution overheads

It includes: Indirect material used such as packing material, printing and stationery material, etc. Indirect labour such as salaries of salesmen and sales manager, etc. Indirect expenses such as rent, insurance, advertising expenses, etc.

Statement of cost sheet

Total cost Cost per unit

Direct material Direct labour Direct expenses Prime cost Add works/factory O.H Works cost Add admin. O.H Cost of production Add selling &dist. O.H Total cost or cost of sales

Expenses excluded from costs

Items of expenses which are relating to capital assets, capital losses, payments by way of distribution of profits and matters of pure finance should not form a part of the costs. Ex-Income tax, dividends, abnormal wastage of material, interest on capital, expenses of raising capital, writing of goodwill, capital expenditure, discount on shares,appropriation of profits etc.

Advantages of cost sheet

It indicates the breakup of the total cost by element i.e. materials , labor & overheads. It discloses the total cost & cost per unit of the units produced. It helps the management in fixing the selling price. It helps the management as a guide for formulating policy. It helps to keep control over production. It helps management in submitting quotation or preparing for tenders.

Treatment of stock
Stock of raw materials : Opening stock of R.M *** Add: purchase of R.M *** Less closing stock of R.M *** Cost of R.M consumed ***

Stock of work in progress

Prime cost *** Add factory O.H incurred *** Add work in progress (beginning) *** Less work in progress (closing) *** Factory or works cost ***

Stock of finished goods

Cost of production Add:opening stock of f.g Less:closing stock of f.g Cost of goods sold *** *** *** ***

Treatment of scarp
Scarp may be defined as an unavoidable residue material arising in certain type of manufacturing processes. Examples of scarp are trimmings, turnings or boring from metals or timber on which operations are performed. Scarp usually has a small realisable value. Such realisable value of scarp is deducted from either factory overhead or factory cost while preparing a cost sheet.

Thank Q