Cost Sheet Final Document

MEANING OF COST ‘COST’ represents a sacrifice of values, a foregoing or a release of something of value. It is the price of economic resources used as a result of producing or doing the thing costed. It is the amount of expenditure incurred on a given thing. Cost has been defined as the amount measured in money or cash expended or other party transferred, capital stock issued, services performed or a liability incurred in consideration of goods and serviced received or to be received. By cost, we mean the actual cost i.e. historical cost. ICWA (UK) defines cost as the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity. CLASSIFICATION OF COST Cost classification is the process of grouping costs according to their common features. Costs are to be classified in such a manner that they are identified with cost center or cost unit. ON THE BASIS OF BEHAVIOUR OF COST Behavior means change in cost due to change in output. On the basis of behavior cost is classified into the following categories: FIXED COST It is that portion of the total cost which remains constant irrespective of the output upto capacity limit. It is called as a period cost as it is concerned with period. It depends upon the passage of time. It is also referred to as non-variable cost or stand by cost, capacity cost or “period” cost. It tends to be unaffected by variations in output. These costs provide conditions for production rather than costs of production. They are created by contractual obligations and managerial decisions. Rent of premises, taxes and insurance, staff salaries constitute fixed cost.

VARIABLE COST This cost varies according to the output. In other words, it is a cost which changes according to the changes in output. It tends to vary in direct proportion to output. If the output is decreased, variable cost also will decrease. It is concerned with output or product. Therefore, it is called as a “product” cost. If the output is doubled, variable cost will also be doubled. For example, direct material, direct labour, direct expenses and variable overheads. It is shown in the diagram below.

SEMI-VARIABLE COST This is also referred to as semi-fixed or partly variable cost. It remains constant up to a certain level and registers change afterwards. These costs vary in some degree with volume but not in direct or same proportion. Such costs are fixed only in relation to specified constant conditions. For example, repairs and maintenance

of machinery, telephone charges, supervision professional tax, etc.

ON THE BASIS OF ELEMENTS OF COST Elements means nature of items. A cost is composed of three elements, material, labour and expenses. Each of these elements can be direct and indirect. DIRECT COST It is the cost which is directly chargeable to the product manufactured. It is easily identifiable. Direct cost consists of three elements which are as follows: • DIRECT MATERIAL It is the cost of basic raw material used for manufacturing a product. It becomes a part of the product. No finished product can be manufactured without basic raw materials. It is easily identifiable and chargeable to the product. For example, leather in leatherwares, pulp in paper, steel in steel furniture, sugarcane for sugarcane etc. what is raw material for one manufacturer might be finished product for another. Direct material includes the following:

1. All materials specially purchased for production or the process. 2. All components purchased for production or the process. 3. Material transferred from one cost center to another or one process to another. 4. Primary packing materials, wrappings, cardboard boxes etc, necessary for preservation or protection of product. Some of the items like nails or thread in the store are a part of finished product. They are not treated as direct materials in view of negligible cost. • DIRECT LABOUR OR DIRECT WAGES It is the amount paid to those workers who are engaged in the manufacturing line for conversion of raw materials into finished goods. The amount of wages can be easily identified and directly charged to the product. These workers directly handle raw materials, work in progress and finished goods on the production line. Wages paid to the workers operating lathes, drilling, cutting machines etc are direct wages. Direct wages are also as productive labour, process labour or prime cost labour. Direct wages include the payment made to the following group of workers: 1. Labour engaged on the capital production of the product. 2. Labour engaged in aiding the operations viz. Supervisor, Foreman, Shop clerks and Worker on internal transport. 3. Inspectors, Analysts needed for such production.

• DIRECT EXPENSES OR CHARGEABLE EXPENSES It is the amount of expenses which is directly chargeable to the product manufactured or which may be allocated to product directly. It can be easily identified with the product. For example, hire charges of a special machine used for manufacturing a product, cost of designing the product, cost of patterns, architects fees/surveyors fees, or job cost of experimental work carried out especially for a job etc. Cost of special drawings, cost of special

layout designs, patents, patterns, cost of models, surveyors fees, Excise duty, royalty on production, cost of rectifying defective work. Utility of such expenses is exhausted on completion of job. • INDIRECT COST It is that portion of the total cost which cannot be identified and charged directly to the product. It has to be allocated and apportioned and absorbed over the units manufactured on a suitable basis. It consists of the following three elements: • INDIRECT MATERIAL It is the cost of the material other than direct material which cannot be charged to the product directly. It cannot be treated as a part of the product. It is also known as expenses materials. It is the material which cannot be allocated to the product but which can be apportioned to the cost units. Examples are as follows: 1. Lubricants, cotton waste, oil, grease, stationery etc 2. Small tools for general use 3. Some minor items such as thread in dress making, cost of nails in shoemaking etc • INDIRECT LABOUR It is the amount of wages paid to those workers who are not engaged on the manufacturing line, for example, wages of workers in administration department, watch n ward department, sales department, general supervision. • INDIRECT EXPENSES It is the amount of expenses which is not chargeable to the product directly. It is the cost of giving service to the production department. It includes factory expenses, administrative expenses, selling and distribution expenses etc.

• OVERHEADS OR ON COST OR BURDEN OR SUPPLEMNTARY COST Aggregate of indirect cost is referred to as overheads. It arises as a result of overall operation of a business. According to Weldon overheads mean, ”the cost of indirect material, indirect labour and such other expenses, including services as cannot conveniently be charged direct to specific cost units”. It includes all manufacturing and non-manufacturing supplies and services. These costs cannot be associated with a particular product. The principal feature of overheads is the lack of direct traceability to individual product. It remains relatively constant from period to period. The amount of overheads is not directly chargeable i.e. it has to be properly allocated, apportioned and absorbed on some equitable basis. CLASSIFICATION OF OVERHEADS • ON THE BASIS OF FUNCTIONS • FACTORY OVERHEADS It is the aggregate of all the factory expenses incurred in connection with manufacture of a product. These are incurred in connection with running of factory. It includes the items of expenses viz, factory salary, work managers salary, factory repairs, rent of factory premises, factory lighting, lubricants, factory power, drawing office salary, haulage (cost of internal transport) depreciation of plant and machinery unproductive wages, estimation expenses, royalties, loose tools w/ off, material handling charges, time office salaries, counting house salaries etc. • ADMINISTRATIVE OR OFFICE OVERHEADS It is the aggregate of all the expenses as regards administration. It is the cost of office service or decision-making. It consists of the following expenses: Staff salaries, printing and stationery, postage and telegram, telephone charges, rent of office

premises, office conveyance, printing and stationery and repairs and depreciation of office premises and furniture etc.

• SELLING & DISTRIBUTION OVERHEADS It is the aggregate of all the expenses incurred in connection with sales and distribution of finished product and services. It is the cost of sales and distribution services. Selling expenses are such expenses which are incurred acquiring and retaining customers. It includes the following expenses: (a) Advertisement (b) Show room expenses (c) Traveling expenses (d) Commission to agents (e) Salaries of Sales office (f) Cost of catalogues (g) Discount allowed (h) Bad debts written off (i) Commission on sales (j) Rent of Sales Room (k) Sample and Free gifts (L) After sales service expenses (m) Expenses on demonstration and technical advice to prospective customers (n) Free repairs and servicing expenses (o) Expenses on market research (p) Fancy packing and demonstration. Distribution expenses include all those expense which are incurred in connection with making the goods available to customers these expense includes the following (a) Packing charges (b) Loading charges (c) Carriages on sales (d) Rent on warehouse (e) Insurance and lighting of warehouse (f) Insurance of delivery van (g) Expense on delivery van (h) Salaries of Godownkeeper, drivers and packing staff.

COST SHEET For determination of total cost of production a statement showing the various elements of cost is prepared. This statement is called as a statement of cost or cost sheet. Cost sheet is a statement which provides assembly of the detailed cost of a cost center or a cost unit. It is a statement showing the details of a) total cost of job b) Cost of an operation or order. It brings out the composition of total cost in a logical order under proper classifications & sub-divisions. The period is covered by the cost sheet may be by a week a month or so. Separate columns are provided to show total cost, cost per-unit etc. In case of different products there are different cost sheets for different products. A cost sheet is prepared under output or unit costing method.

PURPOSE OF COST SHEET

1. 2. 3. 4. 5. 6.

It gives the break up of total cost under different elements. It shows total cost as well as cost per unit. It helps in comparison with previous years. It facilities preparation of tenders or quotations. It enables the management to fix up selling price. It controls cost.

DIVISIONS OF COST • PRIME COST It comprises of all direct materials, direct labour and direct expenses. It is also known as flat cost Prime cost = Direct Materials + Direct Labour + Direct Expenses • WORKS COST It is also known as a factory cost or cost of manufacture. It is the cost of manufacturing an article. It includes prime cost and factory expenses. Works Cost = Prime Cost + Factory Overheads • COST OF PRODUCTION It represents factory cost plus administrative expenses. Cost of Production = Factory Cost + Administrative Expenses

• TOTAL COST It represents cost of production plus selling and distribution expenses. Total Cost= Cost of Production + Selling & Distribution Expenses • SELLING PRICE It is the price which includes total cost plus margin of profit or minus loss, if any. Selling Price = Total Cost + Profit (-Loss)

NON COST ITEMS Non-cost items are those items which do not form part of cost of a product. Such items should not be considered while ascertaining the cost of a product. These are items included in the Profit & Loss A/c. These will not come in the cost sheet a) Income tax b) Interest on capital c) Interest on loan d) Profit on Sale of fixed assets e) All the assets f) Donations g) Capital Expenditure h) Discount on shares & Debentures i) Commission to Partners, Managers etc j) Brokerage k) Preliminary Expenses Written off. l) Wealth tax etc

m)Bonus to directors and employees if it is based on profit, expenses of raising capital, penalties & fines.

UTILITY OF COST SHEET • DETERMINE THE TOTAL COST A total cost sheet (statement) helps in determining aggregate cost of manufacturing a product or providing a service. • DETERMINING PRODUCT PRICE A cost sheet helps in identifying the total cost for a product or service which in turn helps in properly pricing of products & services. • COST REDUCTION OR COST CONTROL Cost sheets helps in identifying the total cost stage wise & any unwanted cost can be curtailed. • PREPARE BUDGETS A cost statement helps in preparing budget for each department

• PROFIT PLANNING It helps to minimize cost & increase profits. 1. STAGE WISE COST IDENTIFICATION Costs such as prime cost, factory cost, cost of production, cost of goods sold, total cost of sale etc.

2. DETERMINE THE COST PER UNIT This helps in determining cost per unit on which u can predict further cost.

DETERMINATION OF TOTAL COST Cost of product is determined as per cost attach concept. Total cost of a product consists of various elements of cost which have the quality of coherence. All the elements of cost can be grouped and regrouped. Grouping and regrouping of various elements of cost leads to significant divisions of cost. The logical process of determination of cost by grouping and regrouping various elements is illustrated as follows:

COST SHEET PROFORMA OF COST SHEET PARTICULARS Opening Stock Raw Materials Add: Purchase Add: Carriage Inward Add: Octroi and Customs Duty Less: Closing Stock of Raw Materials Cost of Direct Material Consumed Direct Wages Direct or Chargeable Wages

TOTAL COST Rs.

XXX XXX XXX XXX

PRIME COST XXX Add: Works of Factory Overheads: Indirect Materials Indirect Wages Leave Wages Bonus to Workers Overtime Wages Fuel and Power Rent and Taxes Insurance Factory Lightings Supervision Works Stationary Canteen and Welfare Expenses Repairs Works Salaries Depreciation of Plant and Machinery Works Expenses Gas and Water Technical Director’s Fees Laboratory Expenses Works Transport Expenses Works Telephone Expenses

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

Add: Opening Stock of Work-in-Progress Less: Closing Stock of Work-in-Progress Less: Sale of Waste

XXX XXX

WORKS COST XXX XXX Add: Office and Administration Overheads: Office Salaries Directors Fees Office Rents And Rates Office Stationary and Printing Sundry Office Expenses Depreciation on Office Furniture Subscription to Trade Journals Office Lightings Establishment Charges Directors Traveling Expenses Consultants Fees Contribution to Provident Fund Postage Legal Charges Audit Fees Bank Charges Depreciation And Repairs of Office Equipments Bonus to Staff

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

COST OF PRODUCTION Add :Opening Stock of Finished Goods Less: Closing Stock of Finished Goods

XXX XXX

COST OF GOODS SOLD XXX Add: Selling and Distribution Overheads Advertising Show Room Expenses Salesman’s Salaries and Expenses

XXX

Packing Expenses Carriage Outward Commission of Sales Agents Cost of Catalogues Expenses of Delivery Vans Collection Charges Traveling Expenses Cost Tenders Warehouse Expenses Cost of Mailing Literature Sales Manager’s Salaries Insurance of Showroom Sales Director’s Fees Sales Office Expenses Rent of Sales Office Depreciation of Delivery Vans Expenses of Sales Branch Establishments Branch Office Expenses TOTAL COST/TOTAL OF SALES Profit or Loss SALES

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

ESTIMATION OF COST Very often, the management desires to know, ‘what will be the cost?’ even before the production starts. The purpose to know the cost before it is incurred, might be different. It may be to keep the cost within control or it may be used for profit planning. May times it is required to submit tenders, to give quotations, to prepare price lists etc. For this purpose the estimations of “probable cost” of production is essential. This requires the past cost data to be analysed, present circumstances are taken into consideration and future is projected. The technique is known as estimation of cost. This involves the study of each and every element of cost and their nature of behaviour . Keeping in view the nature of behaviour of elements of cost, it can be classified into following three categories: • FIXED COST Fixed cost is that cost which remains unaffected even though there is change in the level of output. It remains constant at all levels of output for a given period of time. Examples of such costs are rent, rated and taxes of factory premises, salary of general manager, foreman, watchman, insurance, depreciation etc. These expenses incur according to the unit of time and not according to level of production. Hence sometimes it is called as periodic cost. For example such fixed cost is ascertained of a particular concern Rs. 12000 pm. The capacity of this concern is to produce 1000 units pm. If they produce 100 units or 500 units or 700 units or 100 units the fixed cost will remain constant at all these levels of output. This fixed cost remains fixed at all levels of output, but the cost per unit changes if there is a change in the level of output. • VARIABLE COST It is the cost which tends to vary directly with the volume of output. If there is increase in output this cost increases and vice versa. The change in the variable cost takes place in the same direction in which the level of output changes. This cost consists of direct materials, direct wages, direct expenses and some part of indirect expenses which varied according to the level of output. Say for example if standard unit of final product requires the raw materials of Rs.20 per unit the expenses on direct materials will

change if level of output changes. However variable cost per unit will remain unchanged provided the price level does not change. • SEMI-VARIABLE COST This is the third category of nature of behavior of the expenses. These expenses are neither fixed nor variable. These expenses change in the same direction in which the level of output changes. Thus these expenses are partly fixed partly variable in nature. Examples of such expenses are depreciation of plant and machinery, maintenance of factory building etc. These expenses will increase if factory is run from single shift to double or triple shifts. Depreciation and maintenance will increase but not in the same ratio, the output increases. Thus these expenses are neither fixed nor variable cent percent. Hence they are called as semi variable expenses.

CERTIFICATE The following project has been satisfactorily performed by Nikhil Abhyankar 01 Mangala Borkar 11 Sunil Chadda 12 Bhagyesh Gandhi 21 Avinash Dhone 17 Snehal Dolas 19 Roshan Kambli 38 Ketki Khandagale 43 Priyank Mehta 53 Abhijeet Motto 58 studying in Bhavans College, Class F.Y. BMS Div A during the academic year 2008-2009

DECLARATION We hereby declare that this project namely COST SHEET is done solely by our group, which consists of TEN people whose names are given below Nikhil Abhyankar 01 Mangala Borkar 11 Sunil Chadda 12 Bhagyesh Gandhi 21 Avinash Dhone 17 Snehal Dolas 19 Roshan Kambli 38 Ketki Khandagale 43 Priyank Mehta 53 Abhijeet Motto 58 under the expert guidance of our respected professor Mrs. Riddhi Sharma. We further declare that the content of this project is true and to the best of our knowledge.

Solved example of Cost Sheet The accounts of Z ltd for the yr ended 31st Dec 2004, shows the following: Rs. Work office salaries 6500 Administrative office salaries 12600 Cash Discounts Allowed 2900 Carriage Outward 4300 Carriage Inward 7150 Bad Debts Written Off 6500 Repairs to Plant & Machinery 4450 Rents, Rates, Taxes, Insurance etc Factory 8500 Office 2000 Sales 461000 Stock of Raw Materials 1st Jan, 04 48000 st 31 Jan, 04 62000 Materials Purchased 185000 Traveling Expenses 2100 Travelers Salaries and Commission 7700 Productive Wages 126000 Depreciation on Plant & Machinery 6500 Depreciation on Office Furniture 300 Directors Fees 6000 Gas & Water (Factory) 1200 Gas & Water (Office) 400 Managers salary (1/4 office & ¾ Factory) 10000 General Expenses 3400

You are required to prepare a cost statement for the year ended 31st Dec 04

Solution: Z Ltd Cost Statement for the yr ended 31st Dec 2004 Particulars Rs.

Rs.

Raw Materials Consumed: Stock of Raw materials as on 1st Jan 04 (+) Materials Purchased (+) Carriage Inward (-) Stock of Raw Materials as on 31st Dec 04 Raw Materials Consumed Productive Wages Prime Cost

1,77,350 1,26,000 3,03,350

Add: Works/Factory Overheads Work Office Salaries Repairs to P/M Rents, Rates, Taxes & Insurance etc- Factory Depreciation on P/M Gas & Water (Factory) Manager’s Salary (3/4) Works or Factory Overheads Works Cost Add: Office & Administrative Overheads Administrative Office Salaries Rents, Rates, Taxes, Insurance etc- Office Depreciation on Office furniture Director’s Fees Gas & Water (office) Manager’s salary (1/4) General Expenses Office & Administrative Overheads Cost of Production/ Cost of Goods Sold Add: Selling & Distribution Overheads Carriage Outward Traveling Expenses Travelers Salary & Commission Selling & distribution Overheads Total Cost of Sales

48,000 1,85,000 7,150 62,800

6,500 4,450 8,500 6,500 1,200 7,500 34,650 3,38,000 12,600 2,000 300 6,000 400 2,500 3,400 27,200 3,65,200 4,300 2,100 7,700 14,100 3,79,300

Add: Profit (Balancing Figure) Sales

81,700 4,61,000

PROFORMA OF ESTIMATED COST SHEET Total Cost XXX XXX XXX

Per Unit

Prime Cost Factory Overheads Works Cost Office & Administration Overheads

Direct Material Direct Labour Direct Wages

Cost of Production Selling & distribution Overheads Cost of Sales Profit Sales

Per Unit

XXX XXX XXX

Total Cost XXX XXX XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX XXX XXX

XXX XXX

XXX XXX XXX

XXX XXX XXX

XXX XXX XXX

SOLVED EXAMPLE OF ESTIMATED COST SHEET Swadeshi Electronics Ltd. furnishes you the following information for the year ended 31st March 06 Production & sales Sales Direct wages Direct materials Factory overheads Administrative overheads Sales overheads

15000 units Rs. 1275000 Rs. 270000 Rs. 330000 Rs. 225000 Rs.105000 Rs. 90000

On account of intense competition following changes are estimated in the subsequent year: 1. Production and sales activity will be increased by one third 2. Material rate will be lowered by 25%. However there will be increase in consumption by 20% 3. Direct wages cost would be reduced by 20% due to automation 4. Out of the above factory overheads rs. 45000 are fixed in nature. The remaining factory expenses are variable in proportion to the number of units produced 5. Total administrative expenses will be lowered by 40% 6. Sales overhead per unit would remain the same 7. Sales price per unit would be lowered by 20% Prepare a statement of cost for both the yrs ending 31st March 06 and 31st March 07 showing maximum possible details of cost

Solution: Swadeshi Electronics Ltd Cost Sheet for the yr ended 31st Mar 06 & 31st March 07 15000 20000 Total Per Unit Total Per Unit Cost Cost Direct Materials 330000 22 396000 19.8 Direct Wages 270000 18 288000 14.4 Prime Cost Factory Overheads

600000

40

684000

34.2

225000

15

285000

14.25

Works Cost Administrative Overheads

825000

55

969000

48.45

105000

07

63000

3.15

Cost of Production Sales Overheads

930000 90000

62 06

1032000 120000

51.6 06

Cost of Sales Profit

1020000 255000

68 17

1152000 208000

57.6 10.4

Sales

1275000

85

1360000

68