What is meant by cost sheet? Explain the importance of Cost Sheet with format.

Cost sheet is a statement, which shows various components of total cost of a product. It classifies and analyses the components of cost of a product. Previous periods data is given in the cost sheet for comparative study. It is a statement which shows per unit cost in addition to Total Cost. Selling price is ascertained with the help of cost sheet. The details of total cost presented in the form of a statement is termed as Cost sheet. It analysis and classified the expense on different items for a particular period in a tabular form.Additional columns may also be provided to show the cost per unit pertaining to each item of expenditure and the total cost per unit.In other word cost sheet is a periodical document of cost sheet is show the total cost and unit of cost of products in an analytical and detailed form.

Cost sheet may be prepared weekly , monthly, quarterly ,half yearly or yearly basis according to convenience.Cost sheet is prepared on the basis of actual data or on the basis of estimated data depending on the technique of costing.

Definition Of cost Sheet : ICMA london “Cost Sheet is a document which provide for the assembly of estimated detailed cost in respect of cost center or a cost of unit.”

According to WW Bigg ” The expenditure which has been incurred upon production for a period is extracted for the financial books and the store record and set out in memorandum statement .If this statement is confined in the disclosure of the cost of the unit produced during the period it is termed a cost sheet.”

Cost sheet is prepared on the basis of

: 1. Historical Cost

 2. Estimated Cost

Historical Cost Historical Cost sheet is prepared on the basis of actual cost incurred. A statement of cost prepared after incurring the actual cost is called Historical Cost Sheet.

Estimated Cost Estimated cost sheet is prepared on the basis of estimated cost. The statement prepared before the commencement of production is called estimated cost sheet. Such cost sheet is useful in quoting the tender price of a job or a contract.

It depicts the following facts

1. It gives total cost and cost per unit for a particular.
2. It shows various element of cost such as prime cost factory csot production cost ,cost of goods sold total cost etc.
3. It s clears the percentage of every expenditure to total cost.
4. it help to management to compare the cost of any two period and ascertain the inefficiencies if any in production.
5. It gives information to management for cost control

It calculate and summarize a total cost of product

The Components of cost are shown in the classified and analytical form in the cost sheet.

Components of total cost are as follows: 

Prime Cost It consists of direct material, direct wages and direct expenses. In other words “Prime cost represents the aggregate of cost of material consumed, productive wages, and direct expenses”. It is also known as basic, first, flat or direct cost of a product.

 Prime Cost = Direct material + Direct Wages + Direct expenses

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. It is calculated as :

Material Consumed = Material purchased + Opening stock of material – Closing stock of material.

Factory Cost

In addition to prime cost it includes works or factory overheads. Factory overheads consist of cost of indirect material, indirect wages, and indirect expenses incurred in the factory. Factory cost is also known as works cost, production or manufacturing cost.

Factory Cost = Prime cost + Factory overheads

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 include 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.

TOTAL COST AND COST SHEET

 If office and administrative overheads are added to factory or works cost, total cost of production is arrived at. Hence the total cost of production is calculated as:

Total Cost of production = Factory Cost + office and administration overheads

Cost of goods sold

It is not necessary, that all the goods produced in a period are sold in the same period. There is stock of finished goods in the opening and at the end of the period. The cost of opening stock of finished goods is added in the total cost of production in the current period and cost of closing stock of finished goods is deducted. The cost of goods sold is calculated as:

Cost of goods sold = Total cost of production + Opening stock of Finished goods – Closing stock of finished goods

Total Cost i.e, Cost of Sales

If selling and distribution overheads are added to the total cost of production, total cost is arrived at. This cost is also termed as cost of Sales. Hence the total cost is calculated as:

Total Cost = Cost of Goods sold + Selling and distribution overheads

Preparation of cost sheet

The various components of cost explained above are presented in the form of a statement. Such a statement of cost consists of prime cost, works cost, cost of production of goods, cost of goods sold, total cost and sales and is termed as cost sheet. The Preparation of a cost sheet can be understood with the help of following illustration:

From the following information, prepare a cost sheet for period ended on 31st March 2006. Rs. Opening stock of raw material 12,500 Purchases of raw material 1,36,000 Closing stock of raw material 8,500 Direct wages 54,000 Direct expenses 12,000 Factory overheads 100% of direct wages Office and administrative overheads 20% of works cost Selling and distribution overheads 26,000 Cost of opening stock of finished goods 12,000 Cost of Closing stock of finished goods 15,000 Profit on cost 20%

IMPORTANCE OF COST ACCOUNTING

1.  Costing helps in periods of trade depression and trade competition:-

In periods of trade depression the business cannot afford to have leakages which pass unchecked.  The management should know where economies may be sought, waste eliminated and efficiency increased.   The business has to wage a wax for its survival.  The management should know the actual cost of their products before embarking on any scheme of reducing the prices on giving tenders.  Adequate costing facilitates this.

2.  Aids in price fixation:-

     Though economic law & supply and demand and activities of the competitors, to a great extent, determine the price of the article, cost to the producer does play an important part. The producer can take necessary guidance from his costing records.

3.   Helps in estimate:-

      Adequate costing records provide a reliable basis upon which tenders and estimates may be prepared.  The chances of losing a contract on account of over – rating or losing in the execution of a contract due to under – rating can be minimized.  Thus, “ascertained costs provide a measure for estimates, a guide to policy, and a control over current production”.

4.   Helps in channeling production on right lines:-

      Costing makes possible for the management to distinguish between profitable and non-profitable activities profit can be maximized by concentrating on profitable operations and eliminating non-profitable ones.

5.   Wastages are eliminated:-

      As it is possible to know the cost of the article at every stage, it becomes possible to chock various forms of waste, such as time, expenses etc. or in the use of machine, equipment and tools.

6.   Costing makes comparison possible:-

      If the costing records are regularly kept, comparative cost data for different periods and various volumes of production will be available.  It will help the management in forming future lines of action.

7.   Provides data for periodical profit and loss accounts:-

      Adequate costing records supply to the management such data as may be necessary for preparation of profit and loss account and balance sheet, at such intervals as may be desired by the management.

      It also explains in detail the sources of profit or loss revealed by the financial accounts thus helps in presentation of better information before the management.

8.   Aids in determining and enhancing efficiency:-

      Losses due to wastage of material, idle time of workers, poor supervision etc., will be disclosed if the various operations involved in manufacturing a product are studied by a cost accountant. The efficiency can be measured and costs controlled and through it various devices can be framed to increase the efficiency.

9.   Helps in inventory control:-

      Costing furnishes control which management requires in respect of stock of materials, work-in-progress and finished goods. (This has been explained in detail under the chapter “Materials”)

10. Helps in cost reduction:-

      Costs can be reduced in the long run when alternatives are tried.  This is particularly important ion the present day context of global competition cost accounting has assumed special significance beyond cost control this way.

11. Assists in increasing productivity

      Productivity of material and labour is required to be increased to have growth and more profitability in the organisation costing renders great assistance in measuring productivity and suggesting ways to improve it.