Cost Accounting Basics

Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Cost Sheet Format

A Cost Sheet depicts the following facts:

1. Total cost and cost per unit for a product.

2. The various elements of cost such as prime cost, factory cost, production cost, cost of goods sold,
total cost, etc.
3. Percentage of every expenditure to the total cost.
4. Compare the cost of any two periods and ascertain the inefficiencies if any.
5. Information to management for cost control
6. Calculate and summarize the total cost of the product.

Objects of Cost Sheet

1. For determining the selling price

A cost sheet helps in determination of selling price of a product or of a service. Cost sheet ascertains cost
at each stage of the product and also the total cost of the product, where a margin of profit is added and
thus the selling price is ascertained.

2. Facilitating in managerial decision making

Preparation of cost sheet helps managers at various levels in their decision-making process such as

1. to produce or buy a component,

2. what price of goods to quote in the tender,
3. whether to retain or replace an existing machine,
4. how to reduce costs and maximize profit.
5. identify and make decisions whether they need to continue with the product or not.

3. Preparation of budgets

Organizations can prepare a budget with the help of a cost sheet. We can prepare the budget by using the
current or previous year’s data.

Based on our existing cost sheet, we can make estimates of our cost for the next financial year. It helps to
prepare and make the necessary arrangement of funds for costs of the next financial year

Elements of Cost

Prime Cost: It comprises of direct material, direct wages, and direct expenses. Alternatively, the Prime
cost is the cost of material consumed, productive wages, and direct expenses.

Factory Cost: Factory cost or works cost or manufacturing cost or production cost includes in addition to
the prime cost the cost in indirect material, indirect labor, and indirect expenses. It also includes amount
or units of WIP or incomplete units at the end of the period.

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Cost of Production: When Office and administration cost at the end of the period are added to the
Factory cost, we arrive at the cost of production or cost of goods sold. Here, we make an adjustment for
opening and Closing finished goods.

Total Cost: Total cost or alternatively cost of sales is the cost of production plus selling and distribution
overheads.

Performa of A Cost Sheet

AMOUNT
PARTICULARS AMOUNT
TOTAL
DIRECT MATERIAL-PURCHASED
ADD OP STOCK OF RAW MATERIAL
LESS CL STOCK OF RAW MATERIAL
MATERIAL CONSUMED
ADD DIRECT WAGES
ADD DIRECT EXPENSES
PRIME COST
ADD WORKS OR FACTORY OVERHEADS
Factory Overheads
ADD OP STOCK OF WIP
LESS CL STOCK OF WIP
WORK COST
ADD ADMINISTRATION OR OFFICE OVERHEADS
COST OF PRODUCTION
ADD SELLING AND DISTRIBUTION OVERHEADS

ADD OP STOCK OF FG
LESS CL STOCK OF FG
COST OF SALES
ADD PROFIT MARGIN
SELLING PRICE

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Method of Preparation of Cost Sheet

Prime Cost = Direct Material Consumed + Direct Labour + Direct
Expenses
Step I
Direct Material= Material Purchased + Opening stock of raw material-
Closing stock of raw material.
Works Cost = Prime Cost + Factory Overheads (Indirect Material +
Step II Indirect Labour + Indirect Expenses)+opening Work in progress-Closing
Work in progress
Cost of Production = Works Cost + Office and Administration overheads
Step III
+ Opening finished goods-Closing finished goods
Step IV Total Cost = Cost of Production + Selling and Distribution Overheads
Profit Sales – Total Cost

Particulars Amount
Direct material-purchased 80000
Direct material -Opening
20000
stock
Direct material -Closing
25000
Stock
Productive wages 22,000
Direct Expenses 5,000
Consumable stores 4000
Factory manager salary 15000
Unproductive wages 7000
Factory Overheads 12,000
Work-in-progress:
Opening stock 13,000
Closing stock 7,000
Office and administration
28,000
overheads
Opening stock of
5000
finished goods
Closing stock of finished
10000
goods
Selling and distribution
33,000
overheads

Company desires a margin of 20% profit on the cost of sales. Prepare the cost sheet

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Ans.

COST SHEET FOR THE MONTH OF__________ FOR XYZ.

AMOUNT
PARTICULARS AMOUNT
TOTAL
DIRECT MATERIAL-PURCHASED 80,000.00
ADD OP STOCK OF RAW MATERIAL 20,000.00
LESS CL STOCK OF RAW MATERIAL 25,000.00 –
MATERIAL CONSUMED 75,000.00 75,000.00
ADD DIRECT WAGES 22,000.00
ADD DIRECT EXPENSES 5,000.00
PRIME COST 102,000.00
ADD WORKS OR FACTORY OVERHEADS
Consumable stores 4,000.00
Factory manager salary 15,000.00
Unproductive wages 7,000.00
Factory Overheads 12,000.00 38,000.00
140,000.00
ADD OP STOCK OF WIP 13,000.00
LESS CL STOCK OF WIP 7,000.00 6,000.00
WORK COST 146,000.00
ADMINISTRATION OR OFFICE
ADD 28,000.00
OVERHEADS
COST OF PRODUCTION 174,000.00
SELLING AND DISTRIBUTION
ADD 33,000.00 33,000.00
OVERHEADS
207,000.00
ADD OP STOCK OF FG 5,000.00
LESS CL STOCK OF FG 10,000.00 –
COST OF SALES 202,000.00
PROFIT MARGIN @ 20% ON COST OF
ADD 40,400.00
SALES
SELLING PRICE 242,400.00

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Problem-1:
The accounts of Basudev Manufactures Ltd. for the year ended 31st December 1988 show the
following:

Find out:

(a) Material Consumed

(b) Prime Cost

(c) Works Cost

(d) Cost of Production

(e) Total Cost and

(f) Sales.

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Solution:

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Problem 2:

Prepare a Cost Sheet for the year ended 31.3.86 from the following figures extracted from the
books of Best Engineering Co.

Opening Stock:

(i) Raw Material 40,350,

(ii) Work-in-Progress 15,000 and

(iii) Finished Stock 35,590.

Cost incurred during the period:

Materials purchased 2,50,000, Wages paid 2,00,000, Carriage inward 2,000, Consumable Stores
10,000, Wages of Storekeeper 7,000, Depreciation of Plant & Machinery 10,000, Materials
destroyed by Fire 5,000, Repairs & Renewals 5,010, Office Manager’s Salary 10,000, Salary to
Office Staff 20,500, Printing & Stationary 10,000, Power 10,500, Lighting for Office Building
2,000, Carriage outward 3,000, Freight 5,000, Entertainment 2,500, Warehousing charges 1,500,
Legal charges 2,000, Expenses for participating in Industrial exhibition-6,000.

Closing Stock:

(i) Raw material 35,000,

(ii) Work-in-Progress 14,500, and

(iii) Finished Stock 40,030. Profit 25% on cost.

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Best Engineering Co.

Cost Sheet: for the year ended 31.3.86

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Problem 3:

From the following figures relating to the manufacture of a Electronic Product during the month
of July 1990, prepare a statement showing Cost and Profit per unit:

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Working Notes:

Calculation of Closing Finished Stock:

Closing Finished Stock= Opening Finished Stock + Production – Sales

= Nil + 20,000 – 18,000 = 2,000.

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

Problem-4

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 Cost Accounting Basics
Cost Accounting notes by Rahul Sir’s MBA/BBA Classes

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