Elements of Cost

Prime Cost = Direct Materials + Direct Labour + Direct Expenses

Overhead = Indirect Materials + Indirect Labour + Indirect Expenses
Overheads are divided into production overhead, office overhead and selling overhead as
follows

1. Production overhead/factory overhead/works overhead/manufacturing overhead, includes

indirect materials, indirect wages and indirect expenses in producing goods or services.
Coal, oil, grease, salary of factory, office staff
2. Office and administration overhead (are of general character and have no direct
connection with production or sales activities). This category of overhead is also
classified into indirect material, indirect labour and indirect expenses.
— Examples : Stationery used in general administrative office, postage, sweeping broom
and brush, etc
3. Selling and distribution overhead. Selling overhead is the cost of promoting sales and
retaining customers. It is defined as “the cost of seeking to create and stimulate demand
and of securing orders.” Examples are advertisement, samples and free gifts, salaries of
salesmen
Cost sheet

Cost sheet is a document which provides for the assembly of the detailed cost of a cost
centre or cost unit. Thus, cost sheet is a periodical statement of cost designed to show in
detail the various elements of cost of goods produced like prime cost, factory cost of
production and total cost. It is prepared at regular intervals, e.g., weekly, monthly,
quarterly, yearly, etc.
 Format of Cost Sheet example

Total Cost per

Particulars cost ($) unit ($)
Opening Stock of Direct Raw Materials
Add Purchases
Add Carriage Inward
Octroi, Customs Duty and other expenses on
Add purchases
Less Closing Stock of Direct Raw Materials
Cost of Direct Materials Consumed
Direct or Productive Wages
Direct (or Chargeable) Expenses
Prime Cost
Add Works or Factory Overheads
Indirect Materials
Indirect Wages
Leave Wages
Overtime Premium
Fuel and Power
Coal
Factory Rent and Taxes
Insurance
Factory Lighting
Supervision
Works Stationery
Canteen & Welfare Expenses
Repairs
Transportation charges
Works Salaries
Depreciation of Plant and Machinery
Works Expenses
Gas and Water
Drawing office salaries
Technical Director's fees
Laboratory expenses
Works Telephone expenses
Internal transport expenses
Less Sale of scrap
Add Opening Stock of Work in progress
Less Closing stock of work in progress
Works Cost
Add Office and Administrative Overheads
Office salaries
Director's fees
Office rent and rates
Office stationery and printing
Sundry offices expenses
Depreciation and repairs of office equipment
Depreciation of office furniture
Subscription to trade journals
Office Lighting
Establishment charges
Director's travelling expenses
Postage
Legal charges
Audit fees
Cost of production
Add Opening stock of finished goods
Less Closing stock of finished good
Cost of goods sold
Add Selling and distribution overheads
Advertising
Showroom expenses
Bad debts
Salesmen's salaries and expenses
Packing expenses
Carriage outward
Commission of sales agents
Counting of house salaries
Cost of catalogues
Expenses of delivery vans
Collection charges
Travelling expenses
Cost of tenders
Warehouse Expenses
Cost of Mailing Literature
Sales Manager's Salaries
Sales Director's Fees
Sales office expenses
Depreciation and repairs of delivery Vans
Expenses of sales branches
Cost of sales (or Total Cost)
Profit
 Sales

Items excluded from cost

The following items are of financial nature and thus not included while preparing a cost
sheet:
1. Cash discount 2. Transfer to reserves 3. Interest paid 4. Donations 5. Preliminary
expenses written off 6. Income-tax paid 7. Goodwill written off 8. Dividend paid 9.
Provision for taxation 10. Profit/ loss on sale of fixed assets 11. Provision for bad debts 12.
Damages payable at law, etc.

*For instructional purposes only. Materials compiled from various sources.