Accounting: Material and Stores: Importance of Cost Sheet and Components of Total Cost

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  • 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:

Table Supporting: Components of Total Cost

Tablutation of: Details, Amount (Rs.)

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 involve 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

Factory overheads 12,000

Work-in-progress: Opening stock 13,000

Closing stock 7,000

Solution:

Statement showing Factory cost

Table Supporting: Adjustments for stock of work-in-progress

Tablutation of: Details, Amount (Rs.)

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

Factory overheads 45,000

Office and administration overheads 28,000

Selling and distribution overheads 33,000

Solution: Statement Showing Total Cost

Table Supporting: Cost of Goods Sold

Tablutation of: Details, Amount (Rs.)

Details

Amount (Rs.)

Direct Material: Material consumed

Direct Labour

Direct Expenses

Prime Cost

Factory Overheads

Works Cost

Office and Administrative Overheads

Total cost of production

Selling and Distribution heads

Total Cost or Cost of Sales

160000

52000

19000

231000

45000

276000

28000

304000

33000

327000

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