Manufacturing

UNIT 10 MANUFACTURING COST SHEET Cost Sheet

Structure

10.0 Objectives
10.1 Introduction
10.2 Cost Sheet: Meaning and Definition
10.3 Cost Sheet: Objectives
10.4 Cost Sheet: Features
10.5 Cost Sheet: Components
10.6 Cost Sheet: Forms
10.7 Cost Sheet: Purposes and Uses
10.8 Estimated Cost Sheet
10.9 Difference between Cost Sheet and Cost Account
10.10 Cost Statement
10.11 Cost Sheet Proforma
10.11.1 Points to be Observed While Preparing Cost Sheet
10.11.2 Information to be Included in Cost Sheet
10.11.3 Categories of Expenses to be Excluded
10.11.4 Treatment of Certain Specific Items (with Format)
10.11.5 Treatment of Stocks (with Illustrations)
10.11.6 Calculation of Profit (with Examples)
10.11.7 Tender or Quotation Price

10.12 Cost Sheet: Advantages

10.13 Let Us Sum Up
10.14 Keywords
10.15 Suggested Readings/ References
10.16 Answers to Check Your Progress Exercises

10.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the conceptual foundation of cost sheets;
 classify and differentiate various types of cost sheets;
 prepare the cost sheet of a product; and
 analyze the significance of cost sheets in facilitating cost control,
decision-making, and overall financial management within an
organization. 213
Cost Sheet
10.1 INTRODUCTION
Dear learners,

You have already learned components of cost i.e., direct and indirect
materials, direct and indirect labour, expenses, and overheads in previous
units. If you need to determine the cost price and selling price of a product or
a service then for this, cost data should be collected in a manner that will
make available cost information to all those who are responsible for the costs.
So, for this purpose, there is a need to prepare a statement of costs which is
called a Cost sheet.

A cost sheet is a statement, prepared at given intervals of time, which

provides information regarding components of cost incurred in production. It
discloses the total cost as well as the cost per unit of the product
manufactured during the given period. If it is desired to compare the costing
results of a particular period with any of the preceding periods, comparative
columns can be provided in the Cost Sheet. It is prepared to ascertain the cost
of a product, job, or operation, to give quotations, or to determine a tender
price for the supply of goods or services.

A cost sheet is an exercise in a collection of information regarding all the

costs incurred in the industry and arranging them in a certain order. The
information required to prepare a cost sheet is gathered from several records
in the organization. Apart from exhibiting the cost sheet, it should also
highlight other costs, so that a comparison with a budget can be made,
variances can be analyzed and further costs can be controlled to increase
profits. In this unit, we will learn about cost sheets, their needs, why we will
prepare cost sheets and how to prepare them.

10.2 COST SHEET: MEANING AND DEFINITION

A cost sheet is a statement presenting the items entering into the cost of
products and services, analyzed by their components, functions and even
their behaviour. It is a statement prepared to show the different components
of cost on a weekly, monthly, quarterly, half-yearly or yearly basis fulfilling
the requirements of the industry.

A Cost sheet may be defined as “a detailed statement of the components

of the cost incurred in production, arranged in a logical order under
different heads such as material, labour and overheads, prepared at
short intervals of time

Further, the Chartered Institute of Management Accountants, London

defines a cost sheet as “a document which provides for the assembly of the
detailed cost of a cost centre or cost unit”

10.3 COST SHEET: OBJECTIVES

214 (1) It reveals the total cost and cost per unit of goods produced.
(2) It discovers the break-up of total cost into different Components of cost. Manufacturing
Cost Sheet
(3) It provides a comparative study of the cost of the current period with that
of the corresponding previous period.
(4) It acts as a guide to management in the fixation of selling prices and
quotation of tenders.

10.4 COST SHEET: FEATURES

i) This statement is usually prepared under the output costing method,
where the object is to ascertain the per unit cost of production.
ii) A cost sheet is prepared for a specified period, generally for a month,
quarter, half-year or year.
iii) The cost sheet generally contains the following information –
a. Period,
b. Total Output,
c. Cost of raw materials consumed,
d. Cost of direct labour,
e. Details of chargeable expenses
F. Details of overheads namely factory, office and administration,
selling and distribution, and
g. Aggregate of Components of cost at various stages e.g., Prime Cost,
Works Cost, Office Cost and Total Cost.

10.5 COST SHEET: COMPONENTS

Various components of the cost sheet are given below:

Component 1. Prime Cost:

Prime cost is the addition of all direct costs. It includes direct material costs,
direct labour costs and other direct costs. Other direct expenses may include
patterns, designs, power expenses etc.

Prime Cost = Direct Material + Direct Labour + Direct Expenses

One should remember that direct material cost means the amount of
direct material consumed during the period which can be calculated or
given below:
Material consumed –
Opening stock of Raw material
+ Purchases made during the year
+ Carriage in words
– Materials returned 215
Cost Sheet – Scrap of raw materials
– Closing stock of raw materials at the end.

Component 2. Factory Cost:

Factory cost is obtained by adding factory-related expenses to the direct
costs.

Factory Cost = Prime Cost + Factory Expenses

Various factory-related expenses are:

i. Indirect materials like oil, lubricants
ii. Indirect labour like foreman, factory manager, clerks
iii. Factory lighting, heating, rent, insurance of factory building
iv. Repairs and maintenance of plants, machine tools, factory building
v. Factory stationery, welfare expenses of the workers etc.

In addition to those adjustments with respect to the cost of opening and

closing works-in-progress (WIP) are also adjusted to calculate net
factory/work cost as given below:
Net factory/work cost –
Gross factory cost
+ Opening stock of WIP
– Closing stock of WIP
WIP: WIP is that part of production in which the same work has been
done but it is still not complete. So WIP is semi-finished stock.

Component 3. Cost of Production /Office Costs:

Cost of Production = Factory Cost + Office Costs

Where office and administration expenses may include:

i. Office salaries

ii. Rent, rate, taxes, depreciation and insurance of office building

iii. Lighting, and heating of the office building

iv. Stationary, printing, telephone expenses and other expenses related

to office building

v. Director and management salaries.

Component 4. Cost of Goods Sold:

The cost of production is adjusted with the value of opening and closing
stock of finished goods to obtain the value of the cost of goods sold, as given
216 below –
 Total Cost of Production Manufacturing
Cost Sheet
+Value of opening stock of finished goods
-Value of closing stock of Finished Goods
Cost of Goods sold

Cost of Goods Sold = Cost of Production Plus / Minus Increase /

Decrease in Finished Stock

Component 5. Cost of Sales:

Various selling and distribution expenses are added to obtain the cost of
sales. Selling and distribution expenses may be fixed or variable in nature.

Cost of Sales = Cost of Goods Sold + Selling and Distribution Expenses

Some examples of selling and distribution expenses are:

i. Salesman salaries and commission
ii. Advertisement expenses
iii. Commission on sales
iv. Warehouses rent, depreciation etc.
v. Depreciation and maintenance of delivery vans
vi. Expenses relating to showrooms.

Component 6. Profit:

The difference between sales and cost of sales is known as profit as

shown below:

Profit = Sales – Cost of Sales

The components have been illustrated in the form of charts:

Figure 10.1: Components of Cost Sheet

217
Cost Sheet  Note:

* Direct Material includes Opening Material + Material Purchase –

Closing Material + Material related expenses

* WIP Adjustment = Opening WIP- Closing WIP

* Finished Goods Adjustment= Opening Finished Goods – Closing

Finished Goods

10.6 COST SHEET: FORMS

Cost Sheet is prepared in three forms:

1. Simple Cost Sheet

2. Cost Sheet of Two or More Types of Products

3. Cost Sheet in Accounts Form

Different forms of cost sheets are explained below:

1. Simple Cost Sheet: Its main objective is to find out the total cost and
per unit cost of goods produced. It is not prepared to get a profit or
loss. However, if sales are given, then per unit profit can also be
calculated.

2. Cost Sheet of Two or More Types of Products: When a producer

produces one product having variation in size, shape, quality, etc. then
he wants to know the item-wise difference of cost regarding the sizes,
shapes or quality of the product. It also helps in determining the
comparative difference of cost to what extent an item or size is more
profitable and which is not profitable.

3. Preparation of Cost Sheet in Accounts Form: A cost sheet can also

be prepared in account form. It is possible when the cost of goods
consumed and expenses of production are given. It can also be used
when different types of production are given and a relationship or
ratio is to be established between costs to total goods consumed for
each and every production.

10.7 COST SHEET: PURPOSES AND USES

Purposes:

1. Helps determine of unit cost of a product or service.

2. Assists in the fixation of selling price.

3. Facilitates cost comparison between two periods.

4. Brings out weaknesses and inefficiencies, if any.

218
Uses: Manufacturing
Cost Sheet
1. It helps in presenting the total cost, the different components of cost
and cost per unit.

2. It helps in fixing the selling price/quotation.

3. It helps in cost control by comparison of various Components of cost

with the help of standard costing.

4. It also helps in formulating production policy.

5. It communicates about Components of cost to all levels of

management.

Check Your Progress Exercise 10.1

Note: a) Use the spaces given below for your answers.

b) Check your answer with those given at the end of the unit.

1. Name three overheads.

……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………

2. What are the different forms of Cost sheets?

……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………

3. Mention two objectives of preparing a cost sheet.

……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………

10.8 ESTIMATED COST SHEET

An estimated cost sheet is a cost sheet that is prepared using estimated
figures. The estimated figures are obtained using part-information which is
adjusted for future changes in other overheads. Thus material, labour and
other overheads are predetermined according to anticipated changes in the
future price levels. Overheads to be charged in the estimated cost sheet can
219
Cost Sheet be calculated using a suitable method of absorption like percentage of
material, labour hour, machine hours etc.

The most important reason for preparing an estimated cost sheet is price
quotation. Every company needs to know the quotation prices in order to
submit a tender, well in advance.

Thus, an estimated cost sheet helps the management to anticipate the prices
of the products to be manufactured. The price quoted in the estimated cost
sheet should include a portion of the desired profit to be earned. The amount
of profit will be decided by management.

10.9 DIFFERENCE BETWEEN COST SHEET AND

COST ACCOUNT

COST SHEET COST ACCOUNT

1. It is a statement showing the 1. A cost account is a ledger

cost of production per unit account maintained in the
or total output. Cost Ledger on the principles
of double entry.

2. It is an independent and 2. The very cost account is a

isolated summary of costs part of the integrated cost
relating to a job or a certain accounting system of the
volume of output. entire organisation.

3. It is prepared for a short 3. Cost accounts are kept for the

period, say for three or six accounting period as a whole
months while production is and are prepared when the
continuous. production is completed.

4. It shows the costing data in 4. Cost accounts make a

an analytical manner to suit presentation of the total
the purpose for which it is amount of costs without
prepared. analysis.

5. It presents costing data on a 5. The cost account does not

unit basis. depict unit cost.

6. It is prepared for the 6. Cost accounts make a record

purpose of cost of actual costs incurred for
determination, cost the purpose of preparing Cost
comparison, pricing, cost records
control and cost estimation.

220
 Manufacturing
10.10 COST STATEMENT Cost Sheet

The cost statement is similar to the cost sheet. The only difference is that in
the case of a cost statement, a separate column for cost per unit with respect
to various cost Components is not prepared alongside the column of total
cost. In the case of a cost statement, the total cost per unit can be ascertained
by dividing the total cost by the number of units produced.

It may be prepared on a weekly, monthly, quarterly or yearly basis according

to convenience. It may be prepared on the basis of actual data (historical cost
sheet) or on the basis of estimated data (estimated cost sheet depending on
the technique of costing employed and the purpose to be achieved). It divides
cost information into prime cost, works cost, cost of production and cost of
sales or total cost. Sometimes information relating to costs, sales and profit or
loss is included in the cost sheet, which is then termed a ‘production
statement’. However, the modern practice is to extend the cost sheet to show
profit and sales also, and call it a ‘statement of cost and profit’.

10.11 COST SHEET PROFORMA

A cost sheet can be prepared by using the following format given below:

1. Simple Cost Sheet

2. Comparative Cost Sheet

3. Detailed Cost Sheet

Here detailed cost sheet is shown as under:

Cost Sheet or Statement of Cost and Profit (Detailed Cost Sheet)

Particulars Cost Total

per Cost (₹)
Unit (₹)
A. Direct Material
Opening stock
+Purchases
+Carriage inwards
-Closing stock
B. Direct wages
C.Direct Expenses
I. Prime Cost (A+B+C)
D. Factory Overheads-
Indirect materials
Loose tools
Indirect wages
Rent and rates (Factory)
Lighting and heating (F)
221
Cost Sheet Power and fuel
Repairs and Maintenance
Drawing office expenses
Research and experiment
Depreciation – plant (F)
Insurance–(F)
Work manager’s salary
Add: Opening Work-in-progress
Less: Closing Work-in-progress
II. Factory cost/works cost(I+D)
E. Office and Administrative Overheads
Rent and rates–office
Salaries–Office
Insurance of office building and equipment
Telephone and postage
Printing and stationery
Depreciation of furniture and office equipment
Legal expenses
Audit fees
Bank charges
III. Cost of production (II + E)
Add: Opening Stock of Finished Goods
Less: Closing Stock of Finished Goods
IV. Cost of Goods Sold
F. Selling and Distribution Overheads
Showroom rent and rates
Salesmen’s salaries and commission
Travelling expenses
Printing and stationery – sales department
Advertising
Postage
Collection expenses
Carriage outward
Depreciation of delivery van
Samples and free-gifts
V. Cost of sales (IV+F)
VI. Profits/loss
VII. Sales (V + VI)
 Note:

1. Sometimes the amount of sales may not be given while information

regarding profit calculation may be given. In such a case, the amount of
sales will be a balancing figure.

2. Opening and closing balances of raw material will be adjusted while

calculating the amount of raw material consumed. Any sale of
scrap/wastages/scrap/material returned will be reduced from the same
222 amount.
 Manufacturing
Cost Sheet
3. The opening and closing balance of WIP will be adjusted in the works
cost in the second part of the account. The opening stock will be shown
on the debit side and the closing balance on the credit side.

10.11.1 Points to be Observed While Preparing the Cost

Sheet
1. If the output or production in units is not given in the problem, then, the
per unit column need not be taken in the cost sheet.

2. The opening stock and closing stock of raw materials should be adjusted
before the arrival of the cost of materials consumed.

3. The opening stock and closing stock of work-in-progress should be

adjusted before the arrival of Works Cost.

4. The opening stock and closing stock of finished goods should be adjusted
before the arrival of the cost of goods sold.

5. The closing stock of finished goods is always valued at the cost of

production per unit. If the value for opening stock of finished goods is not
given specifically, then opening stock also may be valued at the cost of
production per unit.

6. The following expenses should be taken under the head factory

expenses/works expenses-
i. Fuel and power,
ii. Factory rent,
iii. Foremen’s wages,
iv. Lighting,
v. Heating,
vi. Tools used in Consumable stores,
vii. Repairs to buildings,
viii. Indirect materials,
ix. Indirect wages,
x. Leave wages,
xi. Insurance,
xii. Overtime wages,
xiii. Supervision,
xiv. Works stationery,
xv. Canteen and welfare expenses,
223
Cost Sheet xvi. Works salaries,
xvii. Depreciation of plant and machinery,
xviii. Work expenses,
xix. Gas & water,
xx. Technical director’s fee,
xxi. Laboratory expenses,
xxii. Works telephone expenses,
xxiii. Internal transport expenses (Haulage) etc.

7. The following expenses should be taken under office and administration

expenses-
i. Office salaries,
ii. Bank charges,
iii. Legal expenses,
iv. Office rent,
v. Director’s fee,
vi. Printing and stationery,
vii. Office expenses,
viii. Depreciation of office furniture,
ix. Subscription to trade journals,
x. Office lighting,
xi. Establishment charges,
xii. Director’s travelling expenses,
xiii. Postage,
xiv. Audit fee,
xv. Depreciation & repairs of office equipment.

8. The following expenses should be taken under selling and distribution

overheads-
i. Travelling expenses of marketing staff,
ii. Advertising and Showroom expenses,
iii. Sales Commission,
iv. Salesmen salaries, commission & expenses,
v. Packing expenses,
vi. Carriage outwards
224
 vii. Collection charges Manufacturing
Cost Sheet
viii. Cost of catalogue Expenses of sales branch establishment etc.

9. While calculating the cost per unit, the costs should be divided by the
actual units produced till the stage of cost of goods sold. Thereafter, it
should be divided by the actual units sold.

10. The following expenses should not be taken anywhere in the cost sheet-
i. Income tax paid,
ii. Preliminary expenses and goodwill written off,
iii. Interest paid on borrowed capital,
iv. Dividend paid,
v. Hire purchase instalment paid and other such financial expenses.

10.11.2 Information to be Included in Cost Sheet

(i) Cost and volume of materials consumed, direct wages and other direct
expenses in a particular period.

(ii) Estimated amount of indirect expenses in a particular period and its

distribution under different heads.

(iii) Calculation of the relationship of each COMPONENT of expenditure to

total cost. This type of calculation is generally made in terms of
percentage.

(iv) It shows the comparative figures of the previous period to assess the
progress of the business.

(v) It also makes it possible to calculate the per unit cost and the total cost
on a standardized basis for comparative study.

(vi) It helps in the preparation of a statement of profit and loss with the cost
sheet for a particular period.

(vii) It presents the volume and units produced during a particular period.

10.11.3 Categories of Expenses to be Excluded

While preparing the cost sheet, some broad categories of expenses are not to
be included as they are purely financial items, not forming part of the cost of
production.

These are the following:

(i) Purely Financial Charges:

1. Loss on sale of investment, fixed assets, etc.
2. Fines and penalties
225
Cost Sheet 3. Interest on debentures, bank loans, fixed deposits, mortgages, etc.

4. Obsolescence loss, i.e., loss due to scrapping of machinery before the

expiry of its life

5. Damages payable through a court of law.

(ii) Purely Financial Incomes:

1. Interest received on bank deposits

2. Transfer fee received

3. Discount, commission received

4. Rent/Interest/Dividend receivable

5. Profit on sale of investments, fixed assets etc.

6. Damages received through a court of law.

(iii) Appropriation of Profits:

1. Writing-off goodwill, preliminary expenses, capital raising expenses,
discount on the issue of shares and debentures

2. Income tax

3. Dividend on shares

4. Charitable donations

5. Appropriation to sinking fund

6. Transfer to reserves

7. Excess provision for depreciation due to change in method of

charging depreciation etc.

8. Bad Debts

(iv) Abnormal Gains and Losses:

1. Abnormal losses of materials

2. Abnormal idle time of labour.

These can be explained with the help of illustration given below:

Illustration 1:

From the information, prepare a statement showing expenses that you would
disregard in estimating costs. Rent, rates and insurance of office ₹2500, Bad
Debt ₹200, Income Tax ₹300, Bank charges ₹100 and Donations ₹150.

226
Answer: Manufacturing
Cost Sheet
Expenses excluded from estimating cost ₹
Donations 150
Income Tax 300
Bad debt 200
Total 650

10.11.4 Treatment of Certain Specific Items (with format)

i. Direct Material:

If opening stock of raw materials, purchases of raw materials, carriage on

purchases and closing stock of raw materials are given, then with the help of
the following, Materials consumed (Direct Material) can be calculated –

Opening Stock of Raw Material xxx

Add: Purchase of Raw Material xxx
Add: Carriage on Purchases xxx

Less: Closing stock of Raw Material xxx

Material Consumed xxx

ii. Work-in-Progress:

Work-in-progress means semi-finished goods or partly–finished goods. In

other words, work-in-progress means units on which some work has been
done but which are not yet complete. Usually, it is valued at works cost basis.

If it is valued at works cost, then opening and closing work-in-progress will

be adjusted as follows:

Direct Material xxx

Direct Labour xxx
Direct Expenses xxx
1. Prime Cost xxx
Add: Factory Overhead xxx
Add: Opening WIP xxx
Less: Closing WIP xxx
2. Works Cost xxx

iii. Stock of Finished Goods:

If opening and closing stocks of finished goods are given, then these must be
adjusted before calculating the cost of goods sold, as under-
227
Cost Sheet Works cost xxx
Administrative overheads xxx
Add: opening stock of finished xxx
goods

Less: closing stock of finished xxx

goods
Cost of goods sold xxx
Selling and distribution overheads xxx
Cost of sales xxx

iv. Non-Cost Items:

Non-cost items are those expenses which are excluded from the computation
of cost. E.g. – Donation, income tax, debenture interest, transfer to reserve,
provisions, preliminary expense, discount on issue of shares, dividend,
charity, cash discount, loss on sale of an asset, goodwill written-off, etc.

10.11.5 Treatment of Stocks (with certain illustrations)

(i) Stock of Raw Materials:

While preparing a cost sheet, it is necessary to ascertain the cost of raw

materials consumed. To arrive at the cost of raw materials consumed, the
value of the opening stock of raw materials is added to the cost of raw
materials purchased and the value of the closing stock of raw materials is
deducted from the same.

Illustration 2 (Based on Raw Material):

From the following information, find out purchases.
Raw material consumed = ₹26,500.
Closing Stock = ₹4,500 Opening Stock = ₹3,000

Answer:
We know,
Raw Material Consumed = Opening Stock + Purchases – Closing Stock.
Purchases = Raw Material Consumed + Closing Stock – Opening Stock
= ₹ (26,500 + 4,500 – 3,000)
= ₹ 28,000.

(ii) Concept of Material Scrap or Wastage:

These are materials that are useless for their original purpose. If the scrap
materials are in a raw condition, the cost of materials used should be reduced
by the amount realised from the sale of scrap.
228
If the scrap materials are derived or obtained in the course of the Manufacturing
Cost Sheet
manufacturing process, the amount realised from the sale of such scrap, if
any, should be deducted from works overhead or from the works cost.

(iii) Stock of Work-in-Progress (WIP):

Work-in-progress refers to partly finished goods or goods which are yet in

the manufacturing process. The stock of work-in-progress may be valued at
Prime Cost or Works Cost. In case work-in-progress is valued at prime cost,
the cost of work-in-progress shall consist of the cost of direct materials
consumed, direct wages paid and other direct expenses incurred for the work-
in-progress.

The adjustment for work-in-progress valued at prime cost should be made at

the stage of ascertaining the Prime Cost. But where the work-in-progress is
valued at works cost, the cost of work-in-progress shall consist of the cost of
direct materials consumed, direct wages paid, and direct expenses incurred
for the work-in-progress and a proportionate part of the total works overhead.
Generally, the valuation of the stock of work-in-progress is made on the basis
of work cost.

In case, the basis for the valuation of work-in-progress has not been given, it
should be assumed that the same has been made on the basis of works cost.
The adjustment for the stock of work-in-progress valued at works cost should
be made at the time of calculating the Works Cost.

Illustration 3 (Based on Factory Cost):

Prime Cost = ₹33,500, Depreciation = ₹1,500. Factory rent is 200% of

Depreciation.

Find out the Factory Cost.

Answer:

Particulars ₹
Prime Cost 33,500
Add: Factory Overheads:
Depreciation 1,500
Factory Rent (₹1,500 x 200%) 3,000
Factory Cost 38,000

Illustration 4 (Based on WIP and Cost of Goods Manufactured):

Direct materials cost is ₹ 80,000. Direct labour cost is ₹ 60,000. Factory

overhead is ₹ 90,000. Beginning goods in the process were ₹ 15,000. The
cost of goods manufactured is ₹ 2, 45,000. What is the cost assigned to the
ending goods in the process?

229
Cost Sheet Answer:

Particulars ₹
Direct Material 80,000
Direct Labour 60,000
Prime Cost 1,40,000
Add: Factory Overhead 90,000
Add: Opening WIP 15,000
Less: Closing WIP -
Cost of goods manufactured (given) 2,45,000

As the cost of goods manufactured is given as ₹ 2,45,000, so there will be no

closing goods in process.

(iv) Stock of Finished Goods:

The stock of finished goods or completed units is valued on the basis of

Office Cost (or Cost of Production) and hence the adjustment for the stock of
finished goods is made after ascertaining the Office Cost or Cost of
Production.

The cost of opening stock of finished goods is added to the cost of

production, while the cost of closing stock of finished goods is deducted from
the cost of production and the adjusted figure so arrived at shall be the ‘Cost
of Goods Sold’.

Illustration 5 (Based on Cost of Goods Sold):

Cost of Sales = ₹ 37,416

Advertisement Expenses = ₹ 600

Discount on sales = 50% of advertisement Expenses.

Find Cost of Goods Sold.

Answer:

We know,

Cost of Sales = Cost of Goods Sold + Selling and Distribution

Overheads

Or

Cost of Goods Sold = Cost of Sales – Selling & Distribution Overheads

Both Advertisement Expenses and Discounts on sales together constitute

Selling and Distribution Overhead

230
 Particulars ₹ Manufacturing
Cost Sheet
Cost of Sales 37,416
Less: Selling and Distribution Overheads
Advertisement Expenses 600
Discount on sales50% of ₹600) 300
Cost of Goods Sold 36,516

Illustration 6 (Based on Factory Overhead, Office Overheads and Cost of

Production/Cost of Goods sold):
Cost of Goods sold ₹ 38,316
Prime Cost= 33,500

Prepare a statement of cost of production /goods sold and calculate factory

overheads @ 20% on prime cost and office overheads @ 80% on factory
overheads.

Particulars ₹
Prime Cost 33,500
Add: Factory Overheads (20% of Prime Cost) 6,700
Factory Cost 40,200
Add: Office overheads (80% of Factory overheads) 5,360
Cost of Production/ Goods Sold 45,560

Illustration 7 (Based on Finished Goods and Cost of Production):

Given data that:

Finished goods Opening Inventory ₹ 30,000 Finished goods Closing
Inventory ₹ 50,000 Cost of goods sold ₹ 1,90,000
What will be the value of the Cost of Production?

Answer:
We know,
Cost of Goods Sold = Cost of Production + Opening stock of finished
goods – Closing stock of finished goods. Or
Cost of Production = Cost of Goods Sold + Closing stock of finished
goods – Opening stock of finished goods

Particulars ₹
Cost of Goods Sold 1,90,000
Add: Closing Stock of finished goods 50,000
Less: Opening stock of finished goods (30,000)
Cost of Production 2,10,000
231
Cost Sheet (v) Purchase Expenses:

These are the expenses incurred to get the raw- materials from the places of
their sources to the purchasing industry. These expenses are also considered a
part of the purchase cost of raw materials as the raw materials cannot be
physically brought to the purchasing industry without incurring these
expenses. These expenses are added to the cost of raw materials, in the prime
cost.

Examples of purchase expenses are transportation expenses inwards, freight

charges inwards, import duty, insurance, taxes etc. payable on materials
purchased.

(vi) Sale of Scrap:

Scrap in this context may be considered as the residue of raw materials,

which emerges naturally in some production processes. Scrap cannot be
considered finished goods however it also has a saleable value. This value is
adjusted in the cost sheet by being deducted from the factory cost.

Other Illustrations:

Illustration 8:

Prepare a statement of cost from the following data to show material

consumed, Prime cost, factory cost, Cost of goods sold and profit.

Particulars 1-1-2021 31-12-2021

(₹) (₹)
Raw material 60,000 50,000
Work-in-progress 24,000 30,000
Finished goods 1,20,000 1,10,000
Purchase of materials during the year 9,00,000
Wages paid 5,00,000
Factory overheads 2,00,000
Administration overheads 50,000
Selling and distribution overheads 30,000
Sales 20,00,000

Answer:

Statement of Cost and Profit

Particulars (₹) (₹)

Opening stock of raw materials 60,000
Add: Purchase of raw materials 9,00,000
9,60,000
Less: Closing stock of raw materials 50,000
232
 Materials consumed 9,10,000 Manufacturing
Cost Sheet
Wages paid 5,00,000
Prime cost 14,10,000
Factory overheads 2,00,000
Add: opening stock or WIP 24,000
16,34,000
Less: closing stock of WIP 30,000
Factory cost 16,04,000
Administrative overheads 50,000
Add: opening stock of finished goods 1,20,000
17,74,000
Less: closing stock of finished goods 1,10,000
Cost of goods sold 16,64,000
Selling and distribution overheads 30,000
Cost of sales 16,94,000
Profit 3,06,000
Sales 20,00,000

Illustration 9:
From the following particulars, prepare a cost statement showing the
component of total cost and the profit for the year ended 31st December
2021.

Particulars 1-1- Particulars 31-12-

2021 (₹) 2021 (₹)
Stock of finished goods 6,000 Stock of finished 15,000
goods
Stock of raw materials 40,000 Stock of raw 50,000
material
Work-in-progress 15,000 Work-in-progress 10,000
Purchase of raw materials 4,75,000 General expenses 32,500
Carriage inward 12,500 Sales for the year 8,60,000
Wages 1,75,000 Income tax 500
Works Manager’s Salary 30,000 Dividend 1,000
Factory employees’ 60,000 Debenture interest 5,000
Salaries
Factory rent, taxes and 7,250 Transfer to the 12,500
Insurance sinking fund
replacement of machinery 10,000 Goodwill written off 10,000
Power expenses 9,500 Payment of sales tax 3,250
Other production expenses 43,000 Selling expenses 9,250

233
Cost Sheet Answer:
Statement of Cost and Profit

Particulars ₹ ₹
Opening stock of raw materials 40,000
Add: purchase of raw materials 4,75,000
5,15,000
Less: closing stock of raw materials 50,000
4,65,000
Add: Carriage inward 12,500
Materials consumed 4,77,500
Wages 1,75,000
Prime cost 6,52,500
Factory expenses:
Works manager’s salary 30,000
Factory employees’ salaries 60,000
Factory rent, taxes and insurance 7,250
Power expenses 9,500
Other production expenses 43,000
1,49,750
Add: Opening work-in-progress 15,000
Less: Closing work-in-progress 10,000
Factory cost 8,07,250
Administrative overheads (General expenses) 32,500
Add: opening stock of finished goods 6,000
Less: closing stock of finished goods 15,000
Cost of goods sold 8,30,750
Selling and distribution overheads (Selling 9,250
expenses)
Cost of sales 8,40,000
Profit (Balancing Figure) 20,000
Sales 8,60,000
Note: Interest, Income tax, Dividend, Debenture interest, transfer to sinking fund, Goodwill
written-off and replacement of machinery are finance and compliance costs (non-recurring
costs). Hence such costs are excluded from the cost of goods sold/cost from production and
from the cost of sales.

10.11.6 Calculation of Profit (with Examples)

Profit may be calculated either as a percentage of cost or selling price.

234 Example: Profit as a percentage of cost.

 Factory Expenses 5,700 Manufacturing
Cost Sheet
Administration Expenses 600
Total Cost 6,300
Profit 10% on Total cost 630
(6,300*10%)
Selling Price 6,930

Example: Profit as a percentage of selling price. Here the percentage is on

the selling price. The selling price includes cost + profit.

Factory Expenses 5,700

Administration Expenses 600
Total Cost 6,300
Profit 11.11%* on Total Cost Price 700
Selling Price 7,000
*Sales price – profit = cost price
=100-10=90

The profit of Rs 10 is Rs 90 which is the cost price. So, it is 1/9th of the cost
price i.e., 11.11% of the Total cost price.

10.11.7 Tender or Quotation Price

Generally, production cost is ascertained after the completion of production
work. But sometimes it becomes necessary to ascertain the production cost
before commencing the production work. For example, a contractor will have
to estimate his contract cost before commencing the contract work.

Often, the manufacturer is required to quote the estimated price by adding

some profit for getting the orders from customers. Such estimated price is
known as ‘Tender price or Quotation price’. A tender or quotation price is a
price at which the manufacturer is ready to supply his goods to the customers.

10.12 COST SHEET: ADVANTAGES

The main advantages of a cost sheet available to a manufacturing
concern are as follows:

1. Disclosure of Cost

Cost Sheet enables the manufacturer to ascertain the exact cost per unit in a
scientific manner. Further, it also discloses the extent to which each
COMPONENT of the expenditure contributes to the total cost.

2. Determination of Selling Price

By disclosing the actual cost of production, the cost sheet provides the
manufacturer with a reliable basis for fixing the competitive selling price of
the product. Thus, it saves the manufacturer from losses that arise due to
injudicious fixation of prices without looking at the cost of production. 235
Cost Sheet 3. Cost Control

A cost sheet, by providing a comparative study of various Components of

current costs with the cost of the previous period enables the manufacturer to
find out the causes of variations in cost and to eliminate the adverse factors
and conditions which go to increase the total cost.

4. Determination of Tender Price

The cost sheet provides a reliable basis for preparing tenders or quotations at
which the manufacturer offers to supply goods to a prospective customer at
some future date.

Check Your Progress Exercise 10.2

Note: a) Use the spaces given below for your answers.

b) Check your answer with those given at the end of the unit.

1. Compute the cost of material consumed from the following data:

Opening stock of raw material ₹9,000

Purchases of raw material ₹1,27,000

Closing stock of raw material ₹12,000

2. Prime Cost is ₹41,000. Direct labour cost consists of skilled labour

₹6,000 and unskilled labour ₹2,000. Variable works overhead is 100% of
direct wages and fixed works overhead is 60% of direct wages. The sale
of scrap is ₹1,800. Find out the work cost.
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………

Activity 10.1:

Collect cost information from an agribusiness nearby your place and prepare
a statement of cost as per the format and show the cost as well as the selling
price of a product.
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………

236
 Manufacturing
10.13 LET US SUM UP Cost Sheet

In this unit, you have already learnt the following:

 Cost sheet is a statement presenting the items entering into the cost of
products and services, analyzed by their components, functions and
even by their behaviour.

 The importance of cost sheet: (a) cost ascertainment, (b)fixation of

selling price, (c) help in cost control, (d) facilitates managerial
decisions.

 Components of Total Cost are:

(a) Prime Cost = Direct material + Direct Wages + Direct expenses;

(b) Factory Cost = Prime cost + Factory Overheads;

(c) Cost of Production = Factory Cost + Office Costs;

(d) Cost of goods sold = Cost of Production + Opening stock of

Finished goods – closing stock of finished goods;

(e) Cost of Sales = Cost of goods Sold + Selling and Distribution

overheads.

10.14 KEYWORDS
Cost Account : A cost account is a ledger account maintained in
the Cost Ledger on the principles of double entry.

Cost of Production : It shows the factory cost plus office and

administrative overheads. This is also known as
work cost.

Cost of Sales : It represents the sum of all items of expenditure

incurred in manufacturing, selling and distribution
of a product. It comprises the cost of production
plus selling and distribution overhead.

Cost Sheet : A cost sheet is a statement presenting the items

entering into the cost of products and services,
analyzed by their components, functions and even
by their behaviour.

Cost Statement : Cost Statement is the statement where total cost

per unit can be ascertained by dividing the total
cost by the number of units produced.

Estimated Cost Sheet : An estimated cost sheet is a cost sheet that is

prepared using estimated figures.
237
Cost Sheet Factory Cost/Works : It represents all items of expenses incurred in the
Cost production of a product.

10.15 SUGGESTED READINGS/ REFERENCES

1. Bhattacharyya, A. K., Cost Accounting for Business Managers, Elsevier.

2. Cost Sense, Dr Sreehari Chava, Academy of Cost & Economic Research,

ISBN 978 81 931635 1 1; August 2017.

3. Khan, M.Y. & Jain, P.K., Management Accounting, TMH.

4. Kishore, R. M., Cost and Management Accounting, Taxmann.

5. Lal, J. & Srivastava, S., Cost Accounting, TMH.

6. Maheshwari, S.N., Cost and Management Accounting; Sultan Chand &

Sons.

7. Saxena, V.K. & Vashist, C.D., Cost and Management Accounting; Sultan
Chand & Sons.

8. Study Materials of ICMAI (CMA Intermediate, Paper 8) (Retrieved from:

https://icmai.in/upload/Students/Syllabus2016/Inter/Paper-8-January-
2021.pdf)

10.16 ANSWERS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress Exercise 10.1

1. A cost sheet is a statement, that shows various components of the total

cost of a particular product.

2. The Cost Sheet is prepared in three forms:

a) Simple Cost Sheet

b) Cost Sheet of Two or More Types of Products

c) Cost Sheet in Accounts Form

3. The Objectives of the Cost sheet are:

a) It provides a comparative study of the cost of the current period with

that of the corresponding previous period.

b) It acts as a guide to management in the fixation of selling prices and

quotations of tenders.

Check Your Progress Exercise 10.2

1. Solution:
238
 Particulars Amount (₹) Manufacturing
Cost Sheet
Opening stock of raw material 9,000
Purchases of raw material 1,27,000
Closing stock of raw material 12,000
Cost Of Material Consumed 1,24,000
* Cost of material consumed= opening stock of raw material+ purchase of raw material-
closing stock of raw material

2. Solution:

Particulars ₹
Prime Cost 41,000
Works Overheads:
Add: Variable 100% direct wages 8,000
Add: Fixed 60% direct wages 4,800
Less: Sale of scrap (1,800)
Works Cost 52,000

239