COST SHEET

Samir K Mahajan

COMPONENTS OF TOTAL COST

Prime cost or Direct cost : It is the aggregate of direct material cost, direct labour cost and direct expenses.

i.e. Prime cost or Direct cost = Direct materials + Direct labour + Direct expenses

Factory cost or “works cost” or “manufacturing cost”: It is the aggregate of prime cost and factory overheads.

i.e. Works cost or Factory cost or Manufacturing cost = Prime cost + factory overheads

Office cost or administrative cost or cost of production : It is the aggregate of factory cost and office and administration overheads.

i.e. Office cost or cost of production = Factory cost + Administration overhead

COMPONENTS OF TOTAL COST

Cost of production of goods sold /cost of production of sales = Cost of goods available for sale − Closing stock of finished Goods

= Cost of production + Opening stock of finished goods − Closing stock of finished goods

Total cost or Cost of sales : It is the aggregate of office cost and selling and distribution overheads. This is also called cost of sales

Cost of sales or Total cost = Office cost + Selling and Distribution overheads

The difference between the cost of sales and selling price represents profit or loss.

Illustration 1. Find the Prime Cost, Works Cost, Cost of production, total Cost and profit from thefollowing:- Direct Materials Rs.20000; Direct Labour Rs. 10000; Factory Expenses Rs. 7000;Administration Expenses Rs. 5000; Selling Expenses Rs. 7000 and Sales Rs.60,000.

Solution:Prime Cost = Direct Materials + Direct Labour = Rs.20,000 + Rs.10,000 = Rs.30,000.

Works Cost = Prime Cost + Factory Expenses = Rs.30,000 + Rs.7,000 = Rs.37,000.

Cost of Production = Works Cost + Administration Expenses=Rs.37000+ Rs.5, 000 = Rs.42, 000.

Total Cost or Cost of sales= Cost of Production + Selling Expenses = Rs.42, 000+ Rs.7, 000 = Rs.49, 000.

Profit = Sales - Total Cost = Rs.60,000 - Rs.49,000=Rs.11, 000.

In the determination of different components of cost, certain adjustments have to be carried out forinventories of raw materials, work-in-progress and finished goods as follows:

Consumption of raw material (or) material used: It has to be adjusted with inventories of rawmaterials

Raw materials used = Opening stock + Purchases − Closing stock=Opening stocks of Direct material + Purchase of direct material − Closing stock of direct

material

Work in Progress: It has to be adjusted with works cost (i.e., after computation of prime costbut before determining works cost)

Gross Work cost = Works cost + Opening work-in-progress − Closing work-in-progress

Stock of finished goods: It has to be adjusted with cost of production (i.e., after computation ofworks cost but before determining cost of production) and Cost of production of goodssold/sales.

CONVERSION COSTS

Conversion costs are those costs required to convert raw materials into finished goods thatare ready for sale. The concept is used in cost accounting to derive the value of endinginventory, which is then reported in the financial statements. It can also be used to determinethe incremental cost of creating a product, which could be useful for price setting purposes.Conversion costs are all manufacturing costs except for the cost of raw materials.

Examples of costs that may be considered as conversion costs are direct labour and relatedbenefits Equipment depreciation, Equipment maintenance, Factory rent, Factory supplies,Factory insurance, Machining Inspection, Production utilities, Production supervision, Smalltools charged to expense

Conversion costs = Direct labour + Manufacturing overhead= Prime cost + Manufacturing overhead – direct materials – direct expenses

Illustration: ABC International incurs a total of $50,000 during March in direct labour andrelated costs, as well as $86,000 in factory overhead costs. ABC produced 20,000 units duringMarch. Therefore, the conversion cost per unit for the month was $6.80 per unit (calculatedas $136,000 of total conversion costs divided by the 20,000 units produced).

Cost Sheet: Analysis of Components of Cost

Cost sheet or Statement of Cost: When costing information is set out in the form of a statement, itis called “Cost Sheet”. It is usually adopted when there is only one main product and allcosts almost are incurred for that product only. The information incorporated in a cost sheetwould depend upon the requirement of management for the purpose of control.

An analysis of the total cost of production and cost of sales is carried out by preparing “Cost sheet”.A Cost sheet is an important document prepared by the costing department. Cost sheet is preparedto analyse the components of total cost, thereby determining (i) prime cost, (ii) works cost, (iii) costof production, (iv) cost of sales and (v) profit.

FORMAT OR SPECIMEN OF A COST

Cost Sheet or Statement of Profit and Cost

Direct MaterialDirect LabourDirect Expenses

PRIME COST

Add: Factory overheadWORKS COST (or) FACTORY COST

Add: Administration overhead

COST OF PRODUCTION Add: Selling and distribution overhead

TOTAL COST (or) COST OF SALES

PROFIT

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

SALES XXX

Raw materials consumed 30,000

Wages paid to labourers 12,000

Chargeable expenses—Direct 1,000

Wages of foreman 2.000

Wages of store keeper 1,000

Electricity : Factory 2,500

Office 500

Rent : Factory 1,500

Office 500

Depreciation: Plant and machinery 600

Office furniture 200

Consumable stores 1,000

Manager’s salary 3,000

Office printing and stationery 500

Ex 1: Calculate (i) prime cost, (ii) works cost, (iii) cost of production and (iv) cost of sales, from the followingparticulars:

Solution:

Example 2: From the following particulars, calculate: Cost of raw-materials consumed, prime cost, Works/manufacturing cost, cost of production , cost of production of goods sold, total cost and Profit

Opening stock

Raw materials 10,000

Finished goods 5,000

Raw material purchased 60,000

Wages paid to labourers 25,000

Directly chargeable expenses

3,000

Rent, rates and taxes 4,000

Power 2,500

Factory heating and lighting 2,000

Factory insurance 1,000

Sale of wastage of materials 500

Office management salaries 5,000

Office printing and stationery 300

Salesmen salary 3,000

Travelling expenses 1,200

SALES 1,75,000

Closing stock

Raw materials 7,000

Finished Goods 10,000

Particulars

Step 1: Direct material : Cost of Raw material Consumed (i)Opening Stock 10000(ii) Add: Purchase 60000

70000iii)Less: Closing stock 7000(iv) Less: Sale of wastage materials Step2: Direct labour Step 3: Direct Expenses –chargeable Step 4: Prime Cost (step 1+ step 2+ step 3)

63000500 62500

250003000

90500

Step 5: Add Production overheads (factory) (i) Rent, rate and taxes (ii) Power (iii) Factory heating and lighting(iv) factory insurance Step 6: Factory cost (step 4 + step5)

4000250020001000 95000

100000

Step 7: Add Administrative overheads (i) Office management salary (ii) Office printing and stationary

5000300 5300

Solution: Example 2

Step 7: Add Administrative overheads (i) Office management salary (ii) Office printing and stationary Step 8: Total cost of production (step 6+ step 7)

5000300 5300

175000

Step 9: Add: Opening stock of finished goods

Step 10: Less closing stock of finished goods Sept 11: Cost of production of goods sold

1003005000

110300

10000

100300

Step 12: Add: Selling and Distribution overheads (i) Salaries of salesmen(ii) Travelling expenses Step 13: Cost of sales /total cost (Step 11+ step 12)

30001200 42000

104500

Sept15: Profit (step 15- step 14)Step 15: Sales

70500

175000

Solution: