# Cost Sheet Part 1

To produce or manufacture any product we go through different stages. At every stage we incur certain cost either directly or indirectly. So, we need proper management to analyse the costs incurred. This can be done by preparing the cost sheet.

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. Cost Sheet is prepared on the basis of

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.

### Importance of Cost Sheet:

• Cost Sheet helps in ascertaining the costs incurred.

• It helps in fixing the selling price of the product based on cost incurred.

• It helps in controlling the cost. Estimated cost sheet helps in the control of material cost, labour cost and overheads cost at every point of production.

• It helps management in making decisions in many aspects.

### COMPONENTS of TOTAL COST:

Prime Cost: It also known as Direct cost or Basic cost or first cost of the product. Prime cost represents the aggregate of cost of material consumed, productive wages, and direct expenses.

Prime Cost = Direct material + Direct Wages + Direct expenses

Direct Material is the cost of raw material consumed in the production process. The raw material purchased from suppliers on a regular basis based on production capacity and planning. Sometimes stock will be left. So, Direct material consumption can be calculated as follows –Material Consumed = Material purchased + Opening stock of material- Closing stock of material

Direct Wage cost is the cost incurred to allocate the direct labour to produce the product.

Direct Expenses are costs incurred on patient rights and royalties and rent for hiring special machine etc.

Example:

Calculate prime cost from the following particulars for a production unit: Rs.

Cost of material purchased 30,000

Opening stock of material 6,000

Closing stock of material 4,000

Wages paid 3,000

Rent of hire of a special machine for production 5,000

Solution:

 Details Amount (Rs.) Direct Material: Material consumed Opening stock of raw material 6000 Add: Material Purchases 30000 Material Available for consumption 36000 Less: Closing Stock of raw material 4000 Material Consumed Direct Labour: Wages Direct Expenses: Rent of hire a special machine Prime Cost 32000 3000 5000 40000

Factory Cost: It is also known as Works cost or Production cost or Manufacturing Cost. Factory cost includes prime cost and factory overhead costs. Factory overheads consist of different indirect costs.

Factory Cost = Prime cost + Factory overheads

#### Adjustments for Stock of Work-in-Progress:

Inventory maintains raw material, work-in-progress and finished products. The work-in-progress products involves direct costs and average 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.

Example:

From the following information calculate the works cost. Rs.

Direct material 80,000

Direct Labour 22,000

Direct Expenses 5,000

Work-in-progress: Opening stock 13,000

Closing stock 7,000

Solution:

Statement showing Factory cost

 Details Amount (Rs.) Direct Material: Material Consumed Direct Labour: Productive wages Direct Expenses Prime cost Factory overheads Factory Cost (Gross) Add: Opening stock of work-in-progress Less: Closing stock of work-in-progress Works or Factory cost (Net) 80,000 22,000 5000 107000 12000 119000 13000 132000 7000 125000

#### Total Cost of Production:

Total Cost of production is the sum of factory cost and office and administrative overheads.

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

Cost of Goods Sold: Not all the products are sold at the instant. Cost of goods sold can be calculated by subtracting closing stock of finished goods from the sum of total cost of production and opening stock of finished goods.

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

- Closing stock of finished goods

Total Cost: It is also called as cost of sales. Sum of cost of goods sold and selling & distribution overheads gives the Total Cost of the product.

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

Example:

From the following information calculate the total cost. Rs.

Direct material 1,60,000

Direct Labour 52,000

Direct Expenses 19,000