238 EP-CMA

INTRODUCTION
Today different business and industry needs different costing systems to meet their individual requirements.
It is not possible to devise a single costing system to fulfil everybody’s needs. Different methods of costing
for different industries depending upon the type of manufacture and their nature have been developed.
Various methods of ascertaining costs are available to suit the business need. But the basic principles are
the same in every method. The choice of a particular method of costing depends on the nature of business of
the concern. There are two basic methods of costing viz. – (a) Specific order or job costing (b) Continuous
operation or process costing Brief description of each of the methods are as follows:
SINGLE/OUTPUT/UNIT COSTING
Unit costing refers to the costing procedure, under which costs are accumulated and analyzed under
different elements of cost and then cost per unit is ascertained by dividing the total cost by number of units
produced. It is ideally used in case of concerns producing a single article on large scale by continuous
manufacture. The units of output are identical. The products are homogenous. Concern using single or
output costing produces basically one product or two or more grades of one product.
It is not necessary to maintain separate cost accounts under this system. as all the information required can
be obtained only by organizing and analyzing the financial accounts. On dividing the total expenditure
incurred by the number of units produced, the cost per unit is ascertained.
This system of costing is suitable for breweries, collieries, cement works, steel, brick making, floor mills etc.
In all these cases the unit cost of the article produced requires to be ascertained.
The information on expenditure incurred on material, labour and direct expenses can be available without
any special difficulty. The works and administration expenses actually incurred also are included in the total
cost. Items of indirect expenses which are paid at periodical intervals are included in cost accounts on the
basis of estimates. Selling and distributing expenses are not included in cost sheets since these have no
connection with the quantity produced, If, however, it is decided to include them, the same also are
estimated on the basis of past experience.
COST SHEET
Cost sheet is a document which provides for the assembly of the detailed cost of a cost centre or cost unit. It
is a periodical statement of cost designed to show in detail the various components of cost of goods
produced like prime cost, factory cost, cost of production, total cost and cost per unit. A specimen of a simple
cost sheet is given below:
Cost Sheet (or Statement of Cost) for the period.........
No. of units produced........
Particulars Total Cost
cost per unit

` `
Direct Materials
Direct Labour
Direct (or Chargeable) Expenses*
Prime cost
Add: Works Overheads
Works Cost
Add: Administrative Overheads
Cost of Production
Add: Selling and Distribution Overheads
Total Cost or Cost of Sales

* The terms “direct expenses” have been excluded from prime cost as per CIMA terminology i.e. according to CIMA, prime cost is “the
total cost of direct material and direct labour”.
 Lesson 7 Costing System 239

If possible the cost sheet should have columns for (i) total cost; (ii) percentage to total cost; (iii) cost per unit;
and (iv) corresponding figures of the pervious period and clear figures for each element of cost.

Treatment of stock
Stock requires special treatment while preparing a cost sheet. Stock may be of raw materials, work-in-
progress and finished goods.

Stock of Raw Materials

If opening stock of raw material, purchase of raw materials and closing stock of raw materials are given,
then, raw material consumed can be calculated as follows:
Opening stock of raw materials 
Add: Purchase of raw materials 
Less: Closing stock of raw materials 
Value of raw materials consumed 

Stock of Work-in-Progress
Work-in-progress is valued at prime cost or works cost basis, but latter is preferred. If it is valued at works or
factory cost then opening and closing stock will be adjusted as follows :
Prime cost —
Add: Factory overheads —
Work-in-progress (beginning) —
Less: Work-in-progress (closing) —
Works cost 

Stock of Finished Goods

If opening and closing stock of finished goods are given, then these must be adjusted before calculating cost
of goods sold:
Cost of production 
Add: Opening stock of finished goods 
Less: Closing stock of finished goods 
Cost of goods sold

USES OF COST SHEET

(i) It gives total cost and cost per unit for a particular period.
(ii) It gives information to management for cost control.
(iii) It provides comparative study of actual current costs with the cost of corresponding periods, thus
causes of inefficiencies and wastage can be known and suitably corrected by management.
(iv) It acts as a guide to manufacture in formulation of suitable and definite policies and in fixing up the
selling price.

ITEMS EXCLUDED FROM COST SHEET

The following items are of financial nature and thus not included while preparing a cost sheet.
(i) Cash discount
(ii) Interest paid
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(iii) Preliminary expenses written off

(iv) Goodwill written off
(v) Provision for taxation
(vi) Provision for bad debts
(vii) Transfer to reserves
(viii) Donations
(ix) Income tax paid
(x) Dividend paid
(xi) Profit/loss on sale of assets
(xii) Damages payable at law etc.

PRODUCTION ACCOUNT
If the details of cost sheet or production statement are shown in the form of a ledger account, it is known as
production account. Besides cost of production it also includes selling and distribution expenses. It is
prepared in three parts - the first part gives the cost of production, the second part gives the cost of goods
sold and the third part shows cost of sales or total cost for the period. A specimen of a Production Account is
as follows:
PRODUCTION ACCOUNT
Particulars Amount Particulars Amount
` `
To Direct materials — By Prime Cost c/d —
To Direct labour —
To Direct expense —
______ _______
— —
To Prime Cost b/d — By Cost of goods manufactured —
To Works overheads —
Add: Work in progress —
(Opening)

Less: Work in progress —

(closing)
Less: Sale of by-
products or scrap — _____— _______
— —
To Cost of goods manufactured b/d — By Sales —
To Opening stock of finished goods — By Closing stock of finished goods —
To Gross Profit c/d — _______
— —
To Administration overhead — By Gross Profit b/d —
To Selling and distribution overheads —
To Net Profit — ______
— —
 Lesson 7 Costing System 241

Example
From the following particulars prepare a Production Account showing all details of cost and their break up
and also calculate gross profit and net profit.
1-9-2013 30-9-2013
` `
Stock of Raw Material 75,000 91,500
Stock of Work-in-Progress 28,000 35,000
Stock of Finished Goods 54,000 31,000

` `
Direct Expenses 1,500 Sales 2,11,00
Raw Materials Purchased 66,000 Salesmen Salaries and Commission 6,500
Direct Wages 52,500 Office Rent, Rates etc. 2,500
Indirect Wages 2,750 Sundry Office Expenses 6,500
Factory Expenses 25,000 Advertisement 3,500
Depreciation on Plant and Machinery 3,500 Carriage Outwards 2,500

Solution
PRODUCTION ACCOUNT FOR SEPTEMBER, 2013
` ` `
To Materials Consumed: By Prime Cost b/d 1,03,500
Opening Stock of
Raw Material 75,000
Add: Material Purchased 66,000
1,41,000
Less: Closing Stock of
Raw Materials 91,000 49,500

To Direct Wages 52,500

To Direct Expenses 1,500 _______
1,03,500 1,03,500

To Prime Cost b/d 1,03,500 By Cost of Goods Manufactured 1,27,750

To Factory Overheads:
Indirect Wages 2,750
Factory Expenses 25,000
Depreciation of Plant
and Machinery 3,500 31,250

To Work-in-Progress (opening) 28,000

1,62,750
Less: Work-in-Progress (closing) 35,000 _______
1,27,750 1,27,750

To Cost of Goods Manufactured b/d 1,27,750 By Sales 2,11,000

To Opening Stock of Finished Goods 54,000 By Stock of Finished Goods 31,000
To Gross Profit c/d 60,000 _______
2,42,000 2,42,000
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To Office Expenses: By Gross Profit b/d 60,250

Rent, Rates etc. 2,500
Sundry Office Expenses 6,500 9,000
To Selling Expenses:
Salesmen’s Salaries and
Commission 6,500
Advertising 3,500
Carriage Outwards 2,500 12,500
To Net Profit 38,750 _____
60,250 60,250

COST SHEET AND PRODUCTION ACCOUNT

The following are the points of distinction between cost sheet and production account:

Cost sheet Production Account

(1) It is prepared as a statement. It is prepared as an account.

(2) Expenses are classified to ascertain prime Expenses are not classified.
cost, factory cost, total cost, etc.
(3) To enable comparison, figures of previous No figures of previous period are provided. Hence no
period are provided. comparison is possible.
(4) It is based on actual and estimated figures It is based on actual figures.
of expenses.
(5) It is prepared for each job and sometimes It is prepared for each production department.
for the whole factory.

REVIEW QUESTIONS

Re-write the following sentence after filling-in the blank spaces with
appropriate word:
(i) An account giving details of cost of production, cost of sales and
profit made during a particular period is called ________________.
(ii) Unit cost method is used in ___________ (name two industry).
Correct answer: (i) Production account (ii) Brick, Coal

Illustration 1
The following particulars have been extracted from the books of a manufacturing company for the month of
March, 2014:
`
Stock of materials as on 1st March, 2013 47,000
Stock of materials as on 31st March, 2013 50,000
Materials purchased during the month 2,08,000
Drawing office salaries 9,600
Counting house salaries 14,000
 Lesson 7 Costing System 243

Carriage on purchases 8,200

Carriage on sales 5,100
Cash discount allowed 3,400
Bad debts written off 4,700
Repairs of plant, machinery and tools 10,600
Rent, rates, taxes and insurance (factory) 3,000
Rent, rates, taxes and insurance (office) 1,000
Travelling expenses 3,100
Travellers’ salaries and commission 8,400
Productive wages 1,40,000
Depreciation written off on plant, machinery and tools 7,100
Depreciation written off on office furniture 600
Directors’ fees 6,000
Gas and water charges (factory) 1,500
Gas and water charges (office) 300
General charges 5,000
Manager’s salary 12,000

Out of 48 working hours in a week, the time devoted by the Manager to the factory and office was on an
average 40 hours and 8 hours respectively throughout the month. 1,00,000 units were produced and sold;
there was no opening or closing stock of it.

Prepare a cost sheet showing the following:

(i) Cost of Materials Consumed;
(ii) Prime Cost;
(iii) Works Overhead;
(iv) Works Cost;
(v) Office and Administration Overhead;
(vi) Cost of Production;
(vii) Selling and Distribution Overhead; and
(viii) Total Cost or Cost Sales.

Solution
Cost Sheet of............... Manufacturing Co.

For the month of March, 2014

Particulars Total % to Cost
cost total per unit
` ` ` cost `

Stock of materials as on
1st March, 2014 47,000
Add: Purchase of materials 2,08,000
Carriage on purchases 8,200 2,16,200
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Total material available

for consumption 2,63,200
Less: Stock of Materials as
on 31st March, 2014 50,000 2,13,200 47.89 2.132
Direct labour or productive wages 1,40,000 31.45 1.400
Prime Cost 3,53,200 79.34 3.532
Add: Works Overheads:
Drawing office salaries 9,600
Repairs of plant, machinery and tools 10,600
Rent, rates, taxes and insurance (factory) 3,000
Depreciation on plant machinery and tools 7,100
Gas and water charges (factory) 1,500
 40 
Manager’s salary  × 12,000  10,000 41,800 9.39 0.418
 48 
Works Cost or Factory Cost 3,95,000 88.73 3.950
Add: Office and Administrative Overheads:
Counting house salaries 14,000
Rent, rates, taxes and insurance (office) 1,000
Depreciation on office furniture 600
Directors’ fees 6,000
Gas and water charges (office) 300
General charges 5,000
 8 
Manager’s salary  × 12,000  2,000 28,900 6.49 0.289
 48 
Cost of Production 4,23,900 95.22 4.239
Add: Selling and Distribution Overheads:
Carriage on sales 5,100
Bad debts written off 4,700
Travelling expenses 3,100
Traveller’s salaries and commission 8,400 21,300 4.78 0.213
Total Cost or Cost of Sales 4,45,200 100.00 4.452

Note: Cash discount allowed is a matter of pure finance and hence it is excluded from costs.

Illustration 2
The following information has been obtained form the records of ABC Co. Ltd. for the month of January,
2014:
`
Cost of raw materials on 1/01/2014 30,000
Purchase of raw materials during the month 4,50,000
Wages paid 2,30,000
Factory overheads 92,000
Cost of work-in-progress on 1/01/2014 12,000
Cost of raw materials on 30 /01/2014 25,000
 Lesson 7 Costing System 245

Cost of work-in-progress on 30 /01/2014 15,000

Cost of stock of finished goods on 1 /01/2014 60,000
Cost of stock of finished goods on 30 /01/2014 55,000
Administration overheads 30,000
Selling and distribution overheads 20,000
Sales 9,00,000

Prepare: (i) Cost sheet showing the cost of production of goods manufactured, and (ii) Statement showing
the cost of sales and the profit earned.

Solution:
Cost Sheet of ABC Ltd. for the month of January, 2014

` `
Direct materials consumed:
Cost of raw materials on 1/01/2014 30,000
Add: Purchases of raw-materials during the month 4,50,000
4,80,000
Less: Cost of raw-materials on 30/01/2014 25,000 4,55,000
Direct Labour - wages paid 2,30,000
Prime Cost 6,85,000
Factory overheads 92,000
7,77,000
Add: Cost of work-in-progress on 1/01/2014 12,000
7,89,000
Less: Cost of work-in-progress on 30/01/2014 15,000
Works Cost or Factory Cost 7,74,000
Administration overheads 30,000
Cost of Production of Goods Manufactured 8,04,000

Statement showing the Cost of Sales and Profit for the month of January, 2014
`
Cost of Stock of finished Goods on 1/01/2014 60,000
Add: Cost of goods manufactured during the month 8,04,000
Cost of total goods available for sale 8,64,000
Less: Cost of stock of finished goods on 30/01/2014 55,000
Cost of Goods Sold 8,09,000
Add: Selling and distribution overhead 20,000
Total Cost or Cost of Sales 8,29,000
Sales Price 9,00,000
Profit during the month 71,000

Notes:
(1) Costs of opening and closing stock of work-in-progress have to be adjusted after the Factory
overhead is added to the Prime Cost but before the Works cost is arrived at since Factory overhead
expenses are also incurred on work-in-progress.
(2) Selling and distribution overhead expenses can be incurred only on the goods sold, but not on the
goods lying in stock.