Cost sheet theory PDF

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Component of cost sheet Cost sheet is a periods statement prepared in a columnar from to know the total cost and per unit cost of production. It is a statement of cost which indulges the total on the basis of the following cost components. Prime cost The aggregate of all direct costs, which change in direct proportion to change in output, is called prime cost. It is the total of direct materials cost, direct labor cost and direct expenses. The purpose of determining prime cost is to know the share of the direct cost in the total cost of production. It is also known as basic cost, first cost or flat cost, it is computed as below: Factory or works cost or manufacturing cost Factory or work cost is the total of prime cost and factory or work overhead, which include indirect materials, cost indirect cost, indirect cost and indirect expenses of factory. In other words, when all factory or production or manufacturing expenses are added to prime cost then the total is called factory or work cost. It is also known as total manufacturing cost. Cost of production If office and administrative overhead are added to factory cost, then cost of production can be obtained. In other words, cost of production is the total of factory cost and office and administrative overhead. Office and administrative overhead includes those expenses, which are concerned with the management of office, administrative, finance and other arrangement. Cost of sales or total cost If selling and distribution overhead are added to cost of production, it is called cost of sales or total cost. In other words, the total of cost of production and selling and distribution overhead in knows as cost of sales or total cost. Total cost or cost of sales = cost of production + selling and distribution overheads Selling and distribution overhead includes those expenses, which are used in selling or distributing to the customer. Generally, these overhead include the following expenses. Determination of profit or loss

After determining the amount of total cost or cost of sales, the amount of profit is added to determine the amount of sales or selling price, generally, the amount of profit is calculated on the basis of given percentage as under: (I) When sales is given: Net profit= sales –total cost Treatment of stock in cost sheet Generally the following three types of stocks are observed which should be adjusted in different components of cost –sheet: • Opening and closing stocks of raw materials • Opening and closing stocks of work-in-progress • Opening and closing stock of finished goods. Stock of raw materials Opening and closing stocks of raw materials are adjustment to ascertain the "cost of materials consumed" which is considered as direct materials cost, a part of prime cost. In a cost sheet, opening stock of row materials is shows first. Thereafter, purchase of materials, carriage inward, input important duty etc are added to it closing stock of raw materials is deducted there from for end result "cost of materials consumed". Stock of work-in-progress (w-i-p) Work-in-progress means partly finished goods. These are goods which are not yet completed but in the process of manufacturing. Such goods bear a proportionate part of factory overheads besides prime cost, therefore, opening and closing stocks of such goods i.e. work in progress are adjustment while calculating factory cost in a cost sheet. Stock of finished goods After ascertaining factory cost, office and administrative overhead are added to it and cost of production is determined. Thereafter, opening stock of finished goods is added to it and closing stock of finished goods is deducted goods is deducted there from to get "cost of goods sold". If opening and closing stocks stocks of finished goods are given in units, th

ese units should be valued on the basis of cost per unit (i.e. cost of production per unit). Here, Cost per unit = cost of production/units produced Similarly, if production units exceed sales units, the different will be units of closing stock of finished goods, which will be valued on the basis of cost per unit and will be deducted from cost of production. Treatment of sale of scrap, wastage or defective work

In manufacturing process, some units or certain proportion of production is obtained as wastage, scrap or defective work. If any amount is received from the sales of such wastage or scrap, then if should be deducted either from total factory overhead or from grocers factory cost. Tender or quotation sheet A manufacturing concern is frequently requirement to give tenders or quotations for supply of goods manufactured by it. Again sometimes, it needed to make and estimate of the price of the product to plan the production wisely. The price at which a manufacturing concern agrees to supply its goods is knows as tender or quotation price. Similarly, an estimation of the price of the product in advance is knows as price estimation. A tender or quotation is a formal written to supply goods or services or to do a job for an agreed price i.e. tender or quotation price. Preparation of tender sheet Tender or quotation price is estimated price for future period. For determination of tender or quotation price generally the following based are used: One the basis of percentages of overheads

When separate materials and labor costs, other overheads are given and information for units are not given. Then tender or quotation price is determined on the basis of percentages of overheads'. In this situation, the following formulae are used to determine the percentages of overheads: On the basis of output units When units or quantity of production for previous period and units or quantity for tender or quotation are given but not the separate materials and labor costs for tender or quotation, then tender or quotation price is determined on the basis of per unit cost. In this situation, the following steps are used: (i) The period cost-sheet is prepared by taking by previous period data and by determining cost per unit of different components of costs. (ii) Then after, an estimated cost sheet (i.e. statement of tender or quotation) is prepared by multiplying tender or quotation units by cost per unit of each components of past costsheet. On the basis of special instruction If specific instructions are given regarding materials, labor and different overhead for tender or quotation, then such instruction should be followed according to determined tender or quotation price. Manufacturing

Account

When the data related with the cost of goods manufactured of a commodity are presented is a conventional form of account i.e. in T shape from, and then it is known as manufacturing account. Generally, a manufacturing concern prepares this account to exhibit cost of production or cost

of Preparation

goods of

manufactured. manufacturing

account

A manufacturing account is based on the principle of national account. Therefore, it shows

opening stock of work-in-progress and other direct and indirect costs of goods manufactured ( i.e. factory costs) on its debit side and closing side and closing stock of work-in-progress and sale of scrap or wastage on its credit side. Generally, the balancing figure takes palace in credit side which is called "cost of goods manufactured or cost of production C/D". This account show

the

cost

Manufacturing

production

which

is

transferred

account

for

manufacturing

to

the

trading

profit

and

account. loss

When a manufacturing account is prepared to ascertain manufacturing profit and loss, then trading value of manufacturing cost is kept in credit side inserted of cost of production. In other words, all items on debit and credit side will be the same as mentioned above. But, trading price or trading value of cost of production will be shown on the credit side and balancing figure or trading value of cost of production will be shown on the credit side and balancing figure will be put on debit side of this account as "manufacturing profit" or "manufacturing loss".

@@Additional 4. Important Items Regarding Preparation of Statement of Cost and Cost Sheet: 1. Normal Loss of Materials: This type of loss is unavoidable and arises due to the nature of material. For example – loss by evaporation of liquid materials, loss due to loading and unloading of materials, etc. This loss is not deducted from the cost of material rather it is charged to the output because it is a principle of costing that all normal expenses which are necessarily to be incurred should be included in the cost of production. Therefore, in order to absorb normal material losses in cost, the rates of usable materials are inflated so that such losses are covered. In other words, such normal loss should be ignored and this will get automatically charged to output. 2. Abnormal Loss of Materials: Abnormal losses are those losses which arise due to abnormal reasons such as loss by theft, loss by fire, careless handling etc. The cost of materials abnormally lost should be deducted from the value of materials purchased so that output is charged only for the materials used in production. Abnormal losses are charged to Costing Profit and Loss Account. 3. Wages of Normal Idle Time: Normal idle time is inherent in any work situation and cannot be reduced. The cost of normal idle labour time is charged to the cost of production. Hence, wages of normal idle time is not subtracted from the labour cost.

4. Wages of Abnormal Idle Time: Abnormal idle time arises due to unanticipated causes such as strikes, lockouts, fire, accidents, major machine break-down, earthquakes, etc. Loss of time due to such abnormal causes cannot be planned. Such causes are sudden and non-frequent. The cost of abnormal idle time is not included in cost of production. The wages paid for abnormal idle time should be debited to Costing P/L A/c. Hence, wages of abnormal idle time is subtracted from the labour cost. 5. Sale of Scrap, Defective, Salvage or Residue: If clear information is given, then adjustment of these sales will be made accordingly. But, if it is not clear that what the nature of scrap defective, etc., the sale value of scrap etc. is deducted before computing factory cost. 6. Defective or Rejected Work: Sometimes, under production process there might be defective goods. The production not conforming to the standard set is known as defective. If such goods cannot be rectified, then it may be sold in the market at lower rate. Whatever the amount is collected from such sale is deducted from the factory cost. Similarly the defective units are also deducted from the number of units produced. On the other hand, the defective units which can be rectified by incurring extra expenses, then such extra expenses incurred on such a rectification can be added in factory overhead as an extra factory overhead. After that the saleable units and their costs can be determined. 7. Cash Discount and Trade Discount: Cash discount is not considered as the part of cost of production, since it is of financial nature. Whereas, trade discount is treated as sales promotion expense and is included in selling and distribution expenses or may be deducted from gross sales. 8. Allocation of Joint Expenses: In absence of clear-cut information factory overhead is allocated on the basis of wages ratio and office and administration expenses and selling and distribution expenses on the basis of works cost ratio. 9. Packing Charges: Treatment of packing charges depends upon its nature. If, in absence of packing, goods cannot be sold, then it should be treated as direct expense (i.e. packing of mustard oil etc.). Packing charges in respect of partly finished goods are considered as factory overhead. In the same way, packing expenses concerned with finished goods are included in selling and distribution expenses.

5. Cost Collection or Cost Accumulation: Usually the following procedure is adopted under output costing for the cost accumulation of the various elements of cost: 1. Materials: As materials both direct and indirect are issued to production against properly authorised material requisitions. The direct and indirect material costs can be ascertained through material requisitions. Through the analysis of material requisitions, the quantities of direct and indirect materials issued to production can be ascertained, and on the basis of the prevalent method of pricing material issues, the direct and indirect material costs can be ascertained. Accounting of Materials: Materials are dealt in cost accounting as follows: (i) The direct material costs are taken as a part of Prime Cost. (ii) Indirect material costs are charged to Factory Overheads. (iii) Normal loss of materials is adjusted by inflating the issue price of materials. (iv) Abnormal loss of materials is not taken into account in the cost of production. It is charged to the Costing Profit and Loss Account. 2. Labour: The labour costs are collected periodically through pay rolls kept separately for each section or type of work without the detailed job cards or chits required in job costing. Treatment of Labour Cost in Cost Accounting: Labour cost is dealt as follows: (i) Direct labour costs are treated as a part of Prime Cost. (ii) Indirect labour costs are charged to Factory Overheads. 3. Direct Expenses: Direct expenses or chargeable expenses are separately collected from the financial record where the actual direct expenses incurred are recorded. The main expenses under this head are: (i) Royalty (ii) Architect and surveyor’s fees (iii) Expenses of drawing and designs (iv) Excise duty etc. Treatment: It is treated as a part of Prime Cost....