Cost sheet or a statement of cost

A cost sheet or a statement of cost is a statement that is prepared to present information regarding the various elements of cost incurred in production during a defined period of time. The cost sheet is generally prepared at short intervals (weekly or monthly) and presents the total cost as well as cost per unit of products manufactured during the period.

The cost sheet does not have a statutory format.  It is not part of the accounting system.  The purpose of cost sheet is to present the elements of cost.  Cost sheet may have information pertaining to the previous year in an additional column.  Alternatively, standard costs may also be provided.

Cost sheet shows the breakup of total cost into various elements, sales value of goods and profit earned (or loss incurred) during a period.

Treatment of certain items in preparation of cost sheet.

1. Expenses not included in cost sheet:-

Cost sheet includes only such expenses that are a charge against profit.  Expenditure incurred towards servicing of debt (interest payments), acquisition of assets (capital expenditure) appropriation of profits and payments representing distribution of profits are not included in the preparation cost sheet.

The following is the proforma of cost sheet:

Job cost sheet of Xyz  for the period ended mm.dd.yyyy

Interest on capital, income-tax paid, advance payment of income-tax, sales tax paid, provision for doubtful debts provision for discount on debtors, expenses incurred for raising capital such as underwriting commission, and brokerage, goodwill/preliminary expenses written off, abnormal losses, transfer to sinking fund, profit or loss on sale of an asset, debenture interest, discount received, dividends received, etc.

Cash discount and bad debts:

There is a difference of opinion in the treatment of cash discount allowed and bad debts.  Bad debts in the cost of taking a credit risk.  However, some other experts opine that these expenses are a normal part of selling efforts by any business and hence must be considered as selling and distribution over-heads.

Incomes not included in cost sheet:

The cost sheet does not include any incomes. The only exceptions are sales and sale of scrap.  For Ex.:- interest income, dividend income, rent, transfer fees, etc., are not included in cost sheet.

Scrap:

Scrap is incidental residue.  Scrap can be of direct material itself (remnants of cost, wood pieces or it may refer to the remains after the production process.  In the first case, the amount realized from the sale of such scrapped material must be deducted from the cost of direct material consumed.  In the second case, the value of scrap must be deducted from the total of factory over-heads.

Defectives:

Defectives are finished or semi-finished products that have a defect in them.  Such defects need to be rectified.  This process is done in the factory.  It is quite normal to have defectives.  If the cost of rectification is normal, then such costs are taken as part of factory over-heads.  However, if the number of defectives is very large, then such abnormal expenses are not taken in cost sheet.

Drawing office:

It is a part of factory where drawings, designs etc., are made.  Expenses on drawings made specifically for a product are direct expenses.  However, all other expenditure is part of factory over-head.  Unless specifically mentioned, it must be treated as factory over-head.

Calculation of cost per unit:

The following steps must be followed:

All elements of cost, starting from direct materials consumed to cost of production, must be divided by number of units produced.

The value of opening stock and closing stock of finished goods should not be divided with any figure. Hence, cost of production per unit and cost of goods sold per unit will be same. Selling and distribution over-heads should be divided by number of units sold.

Work-In-Progress:

The value of work-in-progress at the end of the period for which the cost sheet is being prepared is added to the total of factory over-heads. The closing value is deducted from the total. The net figure goes to the outer column of cost sheet. If work-in-progress is valued at prime cost, then the opening value of work-in-progress is added to the total of Direct Material, Direct Wages and Direct Expenses. The closing value is deducted from the same. The final figure obtained is the ‘price cost’.

Value of closing stock:-

If the value of closing stock of finished goods is not available, it can be found from the following formula:

Value of c/stock = closing stock (in units) x cost of production per unit.

Apportionment of expenses:

If an expense has been incurred jointly towards two or more heads, it must be apportioned amongst such heads on a reasonable basis. The salary of General Manager will have to be apportioned amongst factory, office and selling and Distribution over-heads in the ratio of time spent by him on the issues pertaining to the three heads.

Outstanding Expenses:

In preparation of cost sheet, even outstanding expenses are included.

For ex.: If direct wages paid are Rs. 10000 and direct wages outstanding are Rs.1000, then the cost sheet will show a cost of Rs.11000 towards Direct expenses.

Subsidy:

Subsidy is a concession given by the government. The organization receiving subsidy can afford to reduce its desired selling price of its products to the extent of subsidy received.

Dual pricing:

If the industry is subject to dual pricing, the open market price must recover the loss in revenue on account of supplying part of the goods at levy price.

a) Tenders or Quotations:

Cost accounts help a grate deal in preparation of estimates for the tender. Generally, expenses incurred in the previous year are made on the basis for submission of tenders or quotations.

Direct materials required, direct wages and direct expenses are identifiable with the product. Thus, they can be easily ascertained.

Number of units as basis:

If information is provided on number of units produced and sold in the previous year and the number of units for which quotation or estimate is required to be made, then all the over-heads must be absorbed at the cost per unit for each of such over-heads in the previous period. Any increase or decrease in any of the expenses needs to be added or deducted after the total cost for the particular item of expense is arrived at on the basis of number of units being produced.

For Ex.:-Let, factory over-heads in case of a company in the previous production period amounted to Rs.100000 for producing 10000 units. The company plans to produce 15000 units in the current period. It is estimated that factory over-heads will increase by 20% in the current period over the previous period. In such a case, first ascertain the cost of factory over-head per unit in the previous period. The per unit cost of factory over-heads works out to Rs.10. Thus, the total cost of producing 15000 units in the current period would be 15000 units x Rs.10 per unit = Rs.150000. However, there is a 20% increase in factory overheads in the current period. Thus, the estimate for factory overhead will be Rs.150000 + 20% x Rs.150000 = Rs.180000.

Percentage of some other expenses:

If the information is not provided for number of units, factory overheads are estimated and charged on the basis of its percentage to direct wages in the previous year. Similarly, administration, selling and distribution overheads are changed on the basis of their percentage to works cost in the previous year.

Fixed and variable costs:

Variable expenses are expenses that vary in direct proportion to number of units produced. Fixed expenses remain fixed in amount irrespective of the number of units produced.