CHAPTER 6

COST SHEET

LEARNING OUTCOMES

Classify and ascertain cost on the basis of function.

Prepare cost sheet/statement for production of goods and providing of serv

Cost Sheet

Functional Classification
Head of Costs in Cost Sheet
Format of Cost Sheet Advantages of Cost Sheet

6.1 INTRODUCTION
One of the objectives of cost accounting system is ascertainment of cost for a
cost object. The cost objects may be a product, service or any cost centre.
Ascertainment of cost includes elementwise collection of costs, accumulation

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6.2 COST AND MANAGEMENT ACCOUNTING

of the costs so collected for a certain volume or period and then arrange all
these accumulated costs into a sheet to calculate total cost for the cost
object. In this chapter, a product or a service will be the cost object for cost
calculation and cost ascertainment. A Cost Sheet or Cost Statement is “a
document which provides a detailed cost information. In a typical cost sheet,
cost information are presented on the basis of functional classification. However,
other classification may also be adopted as per the requirements of users of the
information.

6.2 FUNCTIONAL CLASSIFICATION OF ELEMENTS

OF COST
Under this classification, costs are divided according to the function for which
they have been incurred. The following are the classification of costs based on
functions:
(i) Direct Material Cost
(ii) Direct Employee (labour) Cost
(iii) Direct Expenses
(iv) Production/ Manufacturing Overheads
(v) Administration Overheads
(vi) Selling Overheads
(vii) Distribution Overheads
(viii) Research and Development costs etc.

6.3 COST HEADS IN A COST SHEET

The costs as classified on the basis of functions are grouped into the following
cost heads in a cost sheet:
(i) Prime Cost
(ii) Cost of Production
(iii) Cost of Goods Sold
(iv) Cost of Sales

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 COST SHEET 6.3

6.3.1 Prime Cost

Prime cost represents the total of direct materials costs, direct employee
(labour) costs and direct expenses. The total of cost for each element has to be
calculated separately.
Direct Material Cost xxx Xxx
Direct Employees (labour) Cost Direct Expenses Xxx
Prime Cost:

Xxxx
(i) Direct Material Cost: It is the cost of direct material consumed. The cost
of direct material consumed is calculated as follows:

Opening Stock of Material Xxx

Add: Additions/ Purchases Xxx
Less: Closing stock of Material (xxx)
Direct materials consumed Xxxx

The valuation of materials purchased and issued for production shall be done as
per methods discussed in the ‘Chapter- 2 Material Cost’.
(ii) Direct Employee (labour) Cost: It is the total of payment made to the
employees who are engaged in the production of goods and provision of
services. Employee cost is also known as labour cost; it includes the following:
(a) Wages and salary;
(b) Allowances and incentives;
(c) Payment for overtimes;
(d) Employer’s contribution to Provident fund and other welfare funds;
(e) Other benefits (leave with pay, free or subsidised food, leave travel
concession etc.)
(iii) Direct Expenses: Expenses other than direct material cost and direct
employee cost, which are incurred to manufacture a product or for provision of
service and can be directly traced in an economically feasible manner to a cost
object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;

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6.4 COST AND MANAGEMENT ACCOUNTING

(b) Hire charges paid for hiring specific equipment;

(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or
provision of service.

6.3.2 Cost of Production

In a conventional cost sheet, this item of cost can be seen. It is the total of
prime cost and factory related costs and overheads.

Prime Cost Xxx

Add : Factory Overheads Xxx
Gross Works Costs Xxxx
Add: Opening stock of Work-in-process Xxx
Less: Closing stock of Work-in-process (xxx)
Factory or Works Costs Xxxx
Add: Quality Control Cost Xxx
Add: Research & Development cost (Process related) Xxx
Add: Administrative Overheads related with production Xxx
Less: Credit for recoveries (miscellaneous income) (xxx)
Add: Packing Cost (Primary packing) Xxx
Cost of Production Xxxx

(i) Factory Overheads: It is also known as works/ production/

manufacturing overheads. It includes the following indirect costs:
(a) Consumable stores and spares
(b) Depreciation of plant and machinery, factory building etc.
(c) Lease rent of production assets
(d) Repair and maintenance of plant and machinery, factory building etc.
(e) Indirect employees cost related with production activities
(f) Drawing and Designing department cost.

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 COST SHEET 6.5

(g) Insurance of plant and machinery, factory building, stock of raw material &
WIP etc.
(h) Amortized cost of jigs, fixtures, tooling etc.
(i) Service department cost such as Tool Room, Engineering & Maintenance,
Pollution Control etc.
(ii) Stock of Work-in-process: The cost of opening and closing stock of work-
in-process is adjusted to arrive at factory/ works cost. The WIP stock is valued on
the basis of percentage of completion in respect of each element of cost.
Students may refer the ‘Chapter- Process & Operation Costing’ to know the WIP
valuation methods.
(iii) Quality Control Cost: This is the cost of resources consumed towards
quality control procedures.
(iv) Research & Development cost: It includes only those research and
development related cost which is incurred for the improvement of process,
system, product or services.
(v) Administrative Overheads: It includes only those administration
overheads which are related to production. The general administration overhead
is not included in production cost.
(vi) Credit for recoveries: The realised or realisable value of scrap or waste is
deducted as it reduces the cost of production.
(vii) Packing Cost (primary): Packing material which is essential to hold and
preserve the product for its use by the customer.

6.3.3 Cost of Goods Sold

It is the cost of production for goods sold. It is calculated after adjusting the
values of opening and closing stocks of finished goods. It can be calculated as below:

Cost of Production Xxx

Add: Cost of Opening stock of finished goods Xxx

Less: Cost of Closing stock of finished goods (xxx)

Cost of Goods Sold xxxx

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6.6 COST AND MANAGEMENT ACCOUNTING

6.3.4 Cost of Sales

It is the total cost of a product incurred to make the product available to the
customer or consumer. It includes Cost of goods sold, administration and
marketing expenses. It is calculated as below:

Cost of Goods Sold xxx

Add: Administrative Overheads (General) xxx
Add: Selling Overheads xxx
Add: Packing Cost (secondary) xxx
Add: Distribution Overheads xxx
Cost of Sales xxxx

(i) Administrative Overheads: It is the cost related with general

administration of the entity. It includes the followings:
(a) Depreciation and maintenance of, building, furniture etc. of corporate
or general management.
(b) Salary of administrative employees, accountants, directors, secretaries
etc.
(c) Rent, insurance, lighting, office expenses etc.

(ii) Selling Overheads: It is the cost related with sale of products or services.
It includes the following costs:
(a) Salary and wages related with sales department and employees
directly related with selling of goods.
(b) Rent, depreciation, maintenance and other cost related with sales
department.
(c) Cost of advertisement, maintenance of website for online sales,
market research etc.
(iii) Packing cost (secondary): Packing material that enables to store, transport,
inform the customer, promote and otherwise make the product marketable.
(iv) Distribution Overheads: It includes the cost related with making the
goods available to the customers. The costs are
(a) Salary and wages of employees engaged in distribution of goods.

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 COST SHEET 6.7

(b) Transportation and insurance costs related with distribution.

(c) Depreciation, hire charges, maintenance and other operating costs
related with distribution vehicles etc.

6.4 COST SHEET/STATEMENT

6.4.1 Presentation of cost information
The cost items in the cost statement shall be presented on ‘basis of relevant
classification’.
Specimen Format of Cost Sheet for a Manufacturing entity

Particulars Total Cost per

Cost (`) unit (`)
1. Direct materials consumed:
Opening Stock of Raw Material xxx
Add: Additions/ Purchases xxx
Less: Closing stock of Raw Material xxx
xxx
2. Direct employee (labour) cost xxx
3. Direct expenses xxx
4. Prime Cost (1+2+3) xxx
5. Add: Works/ Factory Overheads xxx
6. Gross Works Cost (4+5) xxx
7. Add: Opening Work in Process xxx
8. Less: Closing Work in Process (xxx)
9. Works/ Factory Cost (6+7-8) xxx
10. Add: Quality Control Cost xxx
11. Add: Research and Development Cost xxx
12. Add:Administrative Overheads (relating to xxx
production activity)

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6.8 COST AND MANAGEMENT ACCOUNTING

13. Less:Credit for Recoveries/Scrap/By-Products/ (xxx)

misc. income
14. Add: Packing cost (primary) xxx
15. Cost of Production (9+10+11+12-13+14) xxx
16. Add: Opening stock of finished goods xxx
17. Less: Closing stock of finished goods (xxx)
18. Cost of Goods Sold (15+16-17) xxx
19. Add: Administrative Overheads (General) xxx
20. Add: Marketing Overheads :
Selling Overheads xxx
Distribution Overheads xxx
21. Cost of Sales (18+19+20) xxx

6.4.2 Advantages of Cost sheet or Cost Statements

The main advantages of a Cost Sheet are as follows:
(i) It provides the total cost figure as well as cost per unit of production.
(ii) It helps in cost comparison.
(iii) It facilitates the preparation of cost estimates required for submitting
tenders.
(iv) It provides sufficient help in arriving at the figure of selling price.
(v) It facilitates cost control by disclosing operational efficiency.
ILLUSTRATION 1
The following data relates to the manufacture of a standard product during the
month of April, 20X8:

Raw materials ` 1,80,000

Direct wages ` 90,000
Machine hours worked (hours) 10,000
Machine hour rate (per hour) `8

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 COST SHEET 6.9

Administration overheads ` 35,000

Selling overheads (per unit) `5
Units produced 4,000
Units sold 3,600
Selling price per unit ` 125

You are required to PREPARE a cost sheet in respect of the above showing:
(i) Cost per unit
(ii) Profit for the month
SOLUTION
(i) Cost Sheet Output: 4,000 units

Total Cost per

Cost (`) (unit) (`)
Raw materials 1,80,000 45.00
Direct wages 90,000 22.50
Prime cost 2,70,000 67.50
Add: Factory overheads (10,000 hrs × ` 8 per hour) 80,000 20.00
Cost of Production 3,50,000 87.50
Less: Closing Stock of finished goods (4,000 – (35,000) --
3,600 units)
Cost of Goods Sold 3,15,000 87.50
Add: Administration overheads 35,000 8.75
Add: Selling Overheads (3,600 units × ` 5 unit) 18,000 5.00
Cost of sales (total Cost) 3,68,000 101.25
(ii) Statement of Profit

Total Cost
(`)
Sales revenue (3,600 units @ ` 125) 4,50,000
Less: Cost of sales 3,68,000
Profit 82,000

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6.10 COST AND MANAGEMENT ACCOUNTING

ILLUSTRATION 2
The following information has been obtained from the records of ABC
Corporation for the period from June 1 to June 30, 20X8.

On June On June
1, 20X8 30, 20X8
(`) (`)
Cost of raw materials 60,000 50,000
Cost of work-in-process 12,000 15,000
Cost of stock of finished goods 90,000 1,10,000
Purchase of raw materials during June’ 20X8 4,80,000
Wages paid 2,40,000
Factory overheads 1,00,000
Administration overheads (related to production) 50,000
Selling & distribution overheads 25,000
Sales 10,00,000

PREPARE a statement giving the following information:

(a) Raw materials consumed;
(b) Prime cost;
(c) Factory cost;
(d) Cost of goods sold; and
(e) Net profit.
SOLUTION
Statement of Cost & Profit
(for the month of June 20X8)

Amount (`)
Opening stock of raw materials 60,000
Add: Purchase of raw materials during June’ 20X8 4,80,000
Less: Closing stock of raw materials (50,000)
(a) Raw materials consumed 4,90,000

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 COST SHEET 6.11

Add: Direct wages 2,40,000

(b) Prime cost 7,30,000
Add: Factory overheads 1,00,000
Works cost 8,30,000
Add: Opening work-in-process 12,000
Less: Closing work-in-process (15,000)
(c) Factory cost 8,27,000
Add: Administration overheads 50,000
Cost of production 8,77,000
Add: Opening stock of finished goods 90,000
Less: Closing stock of finished goods (1,10,000)
(d) Cost of goods sold 8,57,000
Add: Selling & distribution overheads 25,000
Cost of sales 8,82,000
(e) Net Profit 1,18,000
Sales 10,00,000

SUMMARY
 Cost Sheet: A Cost Sheet or Cost Statement is “a document which provides a
detailed cost information. In a typical cost sheet, cost information are
presented on the basis of functional classification. However, other classification
may also be adopted as per the requirements of users of the information.
 Prime Cost: Prime cost represents the total of direct materials costs, direct
employee (labour) costs and direct expenses.
 Direct Expenses: Expenses other than direct material cost and direct
employee cost, which are incurred to manufacture a product or for
provision of service and can be directly traced in an economically feasible
manner to a cost object.
 Cost of Sales: It is the total cost of a product incurred to make the product
available to the customer or consumer.

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6.12 COST AND MANAGEMENT ACCOUNTING

TEST YOUR KNOWLEDGE

MCQs based Questions
1. Generally, for the purpose of cost sheet preparation, costs are classified on
the basis of:
(a) Functions
(b) Variability
(c) Relevance
(d) Nature
2. Which of the following does not form part of prime cost:
(a) Cost of packing
Cost of tra rtati on paid to bring materials to factory
GST paid on raw materials (input credit can be claimed) rs.
it purchased a special fram
(d Ov tim prem m paid to worke
3. A d. received a
order, for which e for
manufacturing, it is a part o
(a) Direct Materials
(b) Direct expenses
(c) Factory Overheads
(d) Administration Overheads
4. Salary paid to plant supervisor is a part of
(a) Direct expenses
(b) Factory overheads
(c) Quality control cost
(d) Administration cost
5. Depreciation of director’s laptop is treated as a part of:
(a) Administration Overheads
(b) Factory Overheads
(c) Direct Expenses

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 COST SHEET 6.13

(d) Research & Development cost.

6. A manufacture has set-up a lab for testing of products for compliance with
standards, salary of this lab staffs are part of:
(a) Works overheads
(b) Quality Control Cost
(c) Direct Expenses
(d) Research & Development Cost.
7. Audit fees paid to auditors is part of:
(a) Administration Cost
(b) Production cost
(c)(
c S ling & Distribution cost
) N t sho wn in cost heet.
(d)( ary d fact y re staff i s part
d of:
F tory overh ead
)
Production Cost
8. Sal
Direct Employee cost
(a)
Direct Material Cost.
(b)
(c)
(d)
9. Canteen expenses for factory workers are part of:
(a) Factory overhead
(b) Administration Cost
(c) Marketing cost
(d) None of the above.
10. A company pays royalty to State Government on the basis of production, it
is treated as:
(a) Direct Material Cost
(b) Factory Overheads
(c) Direct Expenses
(d) Administration cost.
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6.14 COST AND MANAGEMENT ACCOUNTING

Theoretical Questions
1. DESCRIBE how costs are classified on the basis of function?
2. EXPLAIN the treatment of administration overheads.
3. STATE the advantages of a cost sheet

Practical Questions
1. The books of Adarsh Manufacturing Company present the following data
for the month of April, 20X9:
Direct labour cost ` 17,500 being 175% of works overheads.
Cost of goods sold excluding administrative expenses ` 56,000.
Inventory accounts showed the following opening and closing balances:
April 1 (`)
April 30 (`)
Raw 8,000 10,600
materials
Work 10,500
-in- s 14,500
17,600
Fini ed od 19,000
Other data are:
Selling expenses 3,50 0
2,500 (`
General and administration expenses 75,000
Sales for the month
You are required to:
(i) COMPUTE the value of materials purchased.
(ii) PREPARE a cost statement showing the various elements of cost and
also the profit earned.
2. A Ltd. Co. has capacity to produce 1,00,000 units of a product every month.
Its works cost at varying levels of production is as under:

Level Works cost per unit (`)

10% 400
20% 390

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30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310

Its fixed administration expenses amount to ` 1,50,000 and fixed marketing

expenses amount to ` 2,50,000 per month respectively. The variable
distribution cost amounts to ` 30 per unit.
I of its
output at ` 500 per unit provided it incurs the
t sell 100%
f can i expenditure:
ng further
` 30 per month gi
(a) i t s tems costing unit of sale;
ving the first prize of ` 50,000;
(b) it has lucky draws every 2nd
prize of ` 25,000, 3rd prize of ` 10,000 and three consolation prizes of
` 5,000 each to customers buying the product.
(c) it spends ` 1,00,000 on refreshments served every month to
its
customers;
(d) it sponsors a television programme every week at a cost of ` 20,00,000
per month.
It can market 30% of its output at ` 550 per unit without incurring any of
the expenses referred to in (a) to (d) above.
PREPARE a cost sheet for the month showing total cost and profit at 30%
and 100% capacity level.

ANSWERS/ SOLUTIONS
Answers to the MCQs based Questions
1. (a) 2. (a) 3. (b) 4. (b) 5. (a) 6. (b)
7. (a) 8. (a) 9. (a) 10. (c)

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6.16 COST AND MANAGEMENT ACCOUNTING

Answers to the Theoretical Questions

1. Please refer paragraph 6.1
2. Please refer paragraph 6.3
3. Please refer paragraph 6.4

Answers to the Practical Questions

1. (i) Computation of the value of materials purchased

(`)
Cost of goods sold 56,000
Add: Closing stock of finished goods 19,000
Less: Opening stock of finished goods (17,600)
Cost of goods manufactured 57,400
Add: Closing stock of work-in-progress 14,500
Less: Opening stock of work-in-progress (10,500)
Works cost 61,400

Less: Factory overheads: [ 100 of Direct labour cost] (10,000)

175
Prime cost
51,400
Less: Direct labour
(17,500)
Raw material consumed
33,900
Add: Closing stock of raw materials 10,600
Raw materials available 44,500
Less: Opening stock of raw materials ( 8,000)
Value of materials purchased 36,500

(ii) Cost statement

(`)
Raw material consumed [Refer to statement (i) above] 33,900
Add: Direct labour cost 17,500
Prime cost 51,400
Add: Factory overheads 10,000
Works cost 61,400

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Add: Opening work-in-progress 10,500

Less: Closing work-in-progress (14,500)
Cost of goods manufactured 57,400
Add: Opening stock of finished goods 17,600
Less: Closing stock of finished goods (19,000)
Cost of goods sold 56,000
Add: General and administration expenses 2,500
Add: Selling expenses 3,500
Cost of sales 62,000
Profit (Balance figure ` 75,000 – ` 62,000) 13,000
Sales 75,000

2. (a) Cost Sheet (For the month)

Level of Capacity
30% 100%
30,000 units 1,00,000 units
Per Total Per unit Total (`)
unit (`) (`) (`)
Works Cost 380.00 1,14,00,000 310.00 3,10,00,000
Add: Fixed administration 5.00 1,50,000 1.50 1,50,000
expenses
Add:Fixedmarketing 8.33 2,50,000 2.50 2,50,000
expenses
Add: Variable distribution 30.00 9,00,000 30.00 30,00,000
cost
Add: Special Costs:
- Gift items costs - - 30.00 30,00,000
- Customers’ prizes* - - 1.00 1,00,000
- Refreshments - - 1.00 1,00,000
- Television
programme
sponsorship cost - - 20.00 20,00,000

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6.18 COST AND MANAGEMENT ACCOUNTING

Cost of sales 423.33 1,27,00,000 396.00 3,96,00,000

Profit (Balancing figure) 126.67 38,00,000 104.00 1,04,00,000
Sales revenue 550.00 1,65,00,000 500.00 5,00,00,000

*Customers’ prize cost:

Amount (`)
1st Prize 50,000
nd
2 Prize 25,000
3rd Prize 10,000
Consolation Prizes (3 × `5,000) 15,000
Total 1,00,000

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