Cost and management accounting CA inter Cost Sheet
In this article we will going to discuss Cost Sheet which is an important topic and forms the basis of Cost and Management Accounting for CA Inter Course. The article includes:
– Cost Sheet Meaning
– Advantages of Cost Sheet
– Components of cost such as Prime Cost, Factor Cost, Total Cost and Cost of Production.
– Preparation of Cost Sheet
Let’s start with understanding the Cost Sheet meaning:
COST SHEET MEANING:
Cost sheet is a statement which provides for the assembly of the estimated detailed expenditure in respect of a cost centre or a cost unit. It is a detailed statement of the elements of cost arranged in a logical order under proper classifications. It is prepared to show the detailed expenditure of the total output for a particular period.A cost sheet is a statement in a tabular format which represents the various costs incurred at different stages of business operations. It determines the detailed cost or expenditure made by the organization, along with the cost incurred on each unit of a product or service in a certain period. The cost sheet of a business organization provides an understanding of its performance and efficiency. It helps in competitive analysis and enhances business operations through cost reduction. In short cost sheet is a statement showing the total cost under proper classifications in a logical order.
Cost sheet is only a memorandum statement and does not form part of the double entry system. Additional columns can be added to indicate cost per unit at different stages of production or to enable comparison to be made of the current costs with that of prior costs.
ADVANTAGES OF COST SHEET:
- It indicates the break-up of the total cost by elements, i.e. material, labor, overheads, etc
- It discloses the total cost and per unit cost of the units produced.
- It facilitates comparison.
- It helps the management in deciding the selling price of a product or service.
- It acts as an adviser to the management and helps in formulating production policy.
- It enables to have control over cost of production.
- It helps the management in submitting quotations or preparing estimates for tenders
- It is a simple and useful means of communication of costs to various levels of management
COMPONENTS OF COST:
For manufacturing a product the initial cost incurred, i.e., raw material, labour wages and other production related expenses, is known as prime cost. Prime cost is also knownas direct cost. It is the aggregate of direct materials, direct labour and direct expenses, which are easily recognizable with the product.
Prime cost = Direct Material + Direct Labour + Direct Expenses
Following formula can be used for calculating Direct material:
Direct Material = Material Purchased + Opening stock of Raw material – Closing stock of Raw material.
The factory cost is calculated by summing up the prime cost with the factory overheads and at the same time adjusting the opening and closing stocks of work in progress.It consists of the aggregate of all items of expenses incurred in the manufacturing of a product, i.e. prime cost plus factory expenses. It is also known as works cost or manufacturing cost.
Equation will be:
Factory Cost = Prime cost + Factory overhead + Opening stock of work in progress – Closing stock of work in progress.
Following formula can be used for calculating various indirect overheads incurred at the factory premises:
Factory overhead = Indirect Material + Indirect Labour + Indirect Expenses
It includes all additional items used for manufacturing products such as fuel, oil, stationery items and other factory utilities. It does not include raw material as finished goods. Even the items which are though directly used for making a product, but are inexpensive and small, are considered as indirect material, such as, thread, pins, nuts etc.
The labor engaged in all the activities other than manufacturing of goods or services which are necessary to carry out the business and helps in the production operations is known as indirect labor, such as salary paid to managers, drivers, security staff etc.
All the other overheads which are neither directly contributing to the production operations, nor they can be termed as labor or material expense, are known as indirect expense. These are the expenses made for running the business operations smoothly and include advertisements, rent, electricity, insurance, taxes, depreciation, repairs and maintenance, etc.
Cost of Production:
It includes all the direct and indirect cost, including the material, labour and other expenses, viz., production cost, works or factory cost and office or administration expenses. Production is not considered to be complete without the managerial and facilitating costs.
Equation will be:
Cost of Production = Works Cost + Administration Overhead
Following formula can be used for calculating cost of production of goods sold:
Cost of Production of goods sold = Works Cost + Administration Overhead +Opening stock of finished goods – Closing stock of finished goods.
It consists of cost of production plus all the selling and distribution expenses incurred. Thus, the cost of sales is the aggregate of all the direct and indirect costs connected to the goods sold.
Equation will be:
Total Cost = Cost of production of goods sold + Selling and distribution overhead.
Sales can be found by adding profit to the cost of sales. Generally, selling prices are fixed on the basis of the cost of sales. It ensures that all the costs are recovered and any desired profit is also obtained.
Following formula can be used for calculating profit, if sale price of a product or service is known:
Profit = Sales – Total Cost
Items required for preparation of Cost Sheet
Stock of Raw material:
Calculation of Raw materials consumed:
Stock of Work in Progress:
Work-in-progress are the semi-finished goods on which some work has been done but which are not yet complete at the end of the period. The stock of work-in-progress may be valued at prime cost or factory/work cost basis, but usually, it is valued on the basis of work cost.
Adjustment of stock of work in progress:
Stock of Finished Goods:
It refers to the stock of products on which all factory work has been completed. Thus, it is valued at the cost of completed production.
Adjustment of Stock of Finished Goods:
It means carriage incurred on bringing the raw material purchased. It must be added while calculating the cost of raw material consumed.
Scrap of materials:
Scrap means discarded material which has some value and it is generally either disposed off without further treatment or is initiated into the production process in the place of raw materials.
If the value of scrap is insignificant or minor, then it is credited to profit and loss account as an income.
Total cost is not reduced by the scrap value, thus the cost of production absorbs the cost of scrap.
If the value of scrap is significant, then it is reduced from the cost of material consumed or factory overhead/cost depending upon the stage of scrap.
Items excluded from costs:
The items of expenses, losses or incomes which are related to capital assets, appropriation of profits, amortization of fictitious assets or intangible assets, abnormal gains and losses or items of totally financial nature do not form part (excluded) of the costs.
- loss on sale of building or machinery,
- interest on capital,
- discount on issue or redemption of shares or debentures,
- expenses relating to previous period,
- cash discounts,
- bad debts,
- penalties and fines,
- interest or dividend received on investments,
- transfer fees received,
- profit on sale of fixed assets,
- appropriation of profits such as income-tax,
- dividend paid,
- transfer of profits to reserves or funds,
- donations and charities,
- excess provision for depreciation on fixed assets,
- amortization of fictitious or intangible assets such as goodwill written off, preliminary expenses written off, patents, trademarks and copyrights written off,
- capital issue expenses,
- underwriting commission,
- Loss on issue of shares and debentures written off, etc.
Thus, it should be noted that such items are not taken into consideration while preparing a cost sheet i.e. these must be excluded while preparing cost sheet.
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