cmabdtheblogger: Cost Accounting

Cost Accounting

Cost sheet

Part A: Discussion of general theories about what is cost sheet, how a cost sheet is prepared, what are the uses of a cost sheet in cost accounting, etc. along with the required standard format of a cost sheet.

Part B: 10 Illustrations with solutions.

Part A

What is a cost sheet?

A cost sheet is a statement for arriving at the cost of production and cost of sales of a product, job, operation or work order. It can be prepared at regular intervals − monthly, quarterly or yearly − the regular interval being known as cost period. The cost sheet presents the total as well as per unit cost of products manufactured during the cost period. From cost sheet costing profit can also be calculated by deducting cost of sales from total sale price.

Cost sheets may be prepared on the basis of actual data (e.g. actual expenses, actual output, actual sales, etc.) or on the basis of estimated data (e.g. estimated expenses, estimated output, estimated sales, etc.). It is necessary to make estimation of costs for the purpose of submitting tenders or quotations for a prospective supply order, job or work order.

Uses of cost sheet

1. It helps in fixing the sale price per unit of a product or sale price of a job or work order.

2. It facilitates comparison of costs of similar products, jobs or work order as well as comparison of costs incurred in different periods.

3. It provides information for estimating cost and sale price of a product, job or work order for the purpose of submitting tenders or quotations.

4. It helps in identifying operational inefficiencies and measures for controlling wastes and losses due to unproductive uses of men, machines and materials.

5. It helps in formulating an efficient as well as effective production policy.

Format of a Cost Sheet

Cost sheet for the month of....................

Particulars	Details (Rs)	Total (Rs)	Per unit (Rs)
Opening stock of raw materials		×××
ADD: Purchases of raw materials	×××
ADD: Carriage inward	×××
ADD: Freight inward	×××
ADD: Import duties	×××	×××
		×××
LESS: Scrap materials	×××
LESS: Abnormal loss of materials	×××
LESS: Closing stock of raw materials	×××	×××
COST OF RAW MATERIALS CONSUMED		×××	×××
ADD: Direct wages		×××	×××
ADD: Direct expenses (i.e. chargeable expenses)		×××	×××
PRIME COST		×××	×××
ADD: Factory overheads		×××	×××
GROSS WORKS COST		×××	×××
ADD: Opening stock of work-in-progress	×××
LESS: Closing stock of work-in-progress	×××	×××
NET WORKS COST [FACTORY COST OF PRODUCTION]		×××	×××
ADD: Administration overheads		×××	×××
COST OF PRODUCTION		×××	×××
ADD: Opening stock of finished goods	×××
LESS: Closing stock of finished goods	×××	×××
COST OF GOODS SOLD		×××	×××
ADD: Selling overheads		×××	×××
ADD: Distribution overheads		×××	×××
COST OF SALES / TOTAL COST		×××	×××
ADD: Costing profit (PBIT)		×××	×××
SALES		×××	×××

Important points on preparation of cost sheet:

1. Per-unit costs will be calculated by dividing the total amount by number of units produced up to cost of production per unit, after that per-unit costs as well as per-unit profit and per-unit sales will be calculated by dividing the total amount by number of units sold.

2. Donations (not an element of cost), cash discount allowed (a finance cost), interest paid or payable (a finance cost), dividend paid or payable (an appropriation of profit), income tax (an appropriation of profit) are always to be excluded from cost sheet.

3. Bank charges (charges made by the bank for handling the account and for rendering other financial services) are always to be regarded as an item of administration overhead.

Items Excluded from Cost Accounts

There are certain items which are included in financial accounts of a manufacturing concern but shall not to be included in cost accounts since they are not related to cost of production. These items fall into three categories:-

1. Appropriation of profits:

i. Appropriation to sinking funds

ii. Dividends paid

iii. Taxes on income and profits

iv. Transfers to general reserves

v. Provision for bad debts

vi. Amount written off – goodwill, preliminary expenses, underwriting commission, discount on debentures issued; expenses of capital issue etc.

vii. Capital expenditures specifically charged to revenue

viii. Charitable donation

2. Matters of pure finance:

(a) Purely financial charges:-

i. Losses on sale of investments, buildings, etc.

ii. Expenses on transfer of company’s office

iii. Interest on bank loan, debentures, mortgages, etc.

iv. Damages payable

v. Penalties and fines

vi. Losses due to scrapping of machinery

vii. Remuneration paid to the proprietor in excess of a fair reward for services rendered

(b) Purely financial incomes:-

i. Interest received on bank deposits

ii. Profits made on the sale of investments, fixed assets, etc.

iii. Transfer fees received

iv. Rent receivable

v. Interest, dividends, etc. received on investments.

vi. Brokerage received

viii. Discount, commission received

3. Abnormal gains and losses:

i. Losses or gains on sale of fixed assets.

ii. Loss to business property on account of theft, fire or other natural calamities.

Estimated cost sheet

Estimated cost sheets are usually prepared for estimating the price at which the products are expected to be sold. More specifically, estimated cost sheets are prepared with the objective of calculating the estimated costs for the following purposes:

1. Determining the prices to be quoted against any offer for sale;

2. Preparing different functional budgets for the next accounting period;

3. Identifying actions to be taken now to reap benefit from any expected opportunities in the future market for goods and services used in the manufacture as inputs;

4. Identifying actions to be taken now to be able to deal with any expected threats in the future market for goods and services used in the manufacture as inputs; and

5. Making out an effective plan for production and sale to be carried out in the next accounting period.

When any offer for sale is received from any domestic or foreign customer, price has to be quoted keeping under consideration the expected changes in prices of inputs (such as material, labour and different overheads) which may come up in course of production for the order to be executed. But the basis for all such calculations should be the actual costs already incurred during the previous year or current year, as the case may be.

Overhead recovery rates for estimating the total cost should be based on revised cost sheet for the previous or current year, as the case may be, the revision in the cost sheet being carried out for the changes in input price.

Therefore, steps for preparing the estimated cost sheet may be given as follows:

STEP – 1:

Prepare actual cost sheet for actual production for the current year or previous year, as the case may be, on the basis of records of actual production.

STEP – 2:

Prepare revised cost sheet for actual production on the basis of expected changes in prices of inputs. (Skip this step if there is no price change expected).

STEP – 3:

On the basis of revised cost sheet (or actual cost sheet, as the case may be) establish the different recovery rates. For example:

(a) Factory overhead recovery rate on the basis of direct wages;

(b) Administrative overhead recovery rate on the basis of works cost;

STEP – 4:

Prepare estimated cost sheet for estimated/required production with changed prices and the recovery rates as established in STEP – 3 above.

Re: Bad Debts

According to some accountants bad debts are financial losses and thus excluded from cost accounts. If, however, bad debts are included in cost, it should be treated as selling overhead and may be apportioned to various products on the basis of the credit sales of products. Abnormal amounts of bad debts, which are of exceptional nature, should be included in cost accounts.

ICMAI MTP QUESTION

State the treatment of Bad Debts in Cost record.

ICMAI ANSWER

We know bad debt refer to customers who do not pay money after having purchased the product. This situation arises after the sale is done. Many experts say that bad debt is not an item of expense but it’s a financial loss and thus should be excluded for the purpose of costing. However normal bad debts may be considered as selling expense and included in the cost. An exceptional case like bankruptcy of a big institution may be excluded from the cost.

Part B

Illustration: 1

Following data is available from the cost records of a company for the month of March 2017:

(1) Opening stock of job as on 1st March, 2017:

Job no. A-99:

Dir. Material Rs 80, Dir. Wages Rs 150 and Factory Overheads Rs 200

Job no. A-77:

Dir. Material Rs 420, Dir. Wages Rs 450 and Factory Overheads Rs 400

(2) Direct material issued during the month of March, 2017 was:

Job no A-99 Rs 120

Job no A-77 Rs 280

Job no A-66 Rs 225

Job no A-55 Rs 300

(3) Direct labour details for March, 2017 were:

Job Number	Hours	Rs
A-99	400	600
A-77	200	450
A-66	300	675
A-55	100	225

(4) Factory Overheads are applied to jobs on production according to direct labour hour rate which is Rs 2 per hour.

(5) Factory Overheads incurred in March, 2017 were Rs 2100.

(6) Job numbers A-99 & A-77 were completed during the month. They were billed to the customers at a price which included 15% of the price of the job for Selling & Distribution expenses and another 10% of the price for Profit.

Prepare:

(a) Job cost sheet for job number A-77 and A-99 for the month of March, 2017.

(b) Determine the selling price for the jobs.

Solution: 1

Illustration: 2

Prepare Cost Sheet for an engineering company which produces standard components in batches of 1,000 pieces each. A batch passes through three processes viz. Foundry, Machining & Assembly.

The materials used for a batch number 001 were: Foundry 1,300 tonnes @ Rs 50 per tonne of which 50 tonnes were sent back to stores.

Other details

Process	Direct Labour	Overheads
Foundry	200 hours @ Rs 10 per hour	Rs 15 per labour hour
Machining	100 hours @ Rs 5 per hour	Rs 20 per labour hour
Assembly	100 hours @ Rs 15 per hour	Rs 10 per labour hour

A comparison of actual costs with estimated cost discloses that material and overheads have exceeded the estimates by 20% whereas the estimated labour cost is 10% more than the actual. Show the variances with respect to the estimates.

Solution: 2

Illustration: 3

An advertising agency has received an enquiry for which you are supposed to submit the quotation. Bill of material prepared by the production department for the job states the following requirement of material:

i. Paper 10 reams @ Rs 1,800 per ream

ii. Ink and other printing material Rs 5,000

iii. Binding material & other consumables Rs 3,000

Some photography is required for the job. The agency does not have a photographer as an employee. It decides to hire one by paying Rs 10,000 to him. Estimated job card prepared by production department specifies that service of following employees will be required for this job:

i. Artist (Rs 12,000 per month) 80 hours

ii. Copywriter (Rs 10,000 per month) 75 hours

iii. Client servicing (Rs 9,000 per month) 30 hours

The primary packing material will be required to the tune of Rs 4,000. Production Overheads 40% of direct cost, while the S & D Overheads are likely to be 25% on Production Cost. The agency expects a profit of 20% on the quoted price. The agency works 25 days in a month and 6 hours a day.

Solution: 3

Illustration: 4

PR Ltd. manufactures and sells a typical brand of Tiffin Boxes under its own brand name. The installed capacity of the plant is 1, 20,000 units per year distributable evenly over each month of calendar year. The Cost Accountant of the company has informed the following cost structure of the product, which is as follows:

Raw Material	Rs 20 per unit
Direct Labour	Rs 12 per unit
Direct Expenses	Rs 2 per unit
Variable Overheads	Rs 16 per unit
Fixed Overhead	Rs 3,00,000

Semi-variable Overheads are as follows:

Rs 7,500 per month up to 50% capacity utilisation, and additional Rs 2,500 per month for every additional 25% capacity utilisation or part thereof.

The plant was operating at 50% capacity during the first seven months of the calendar year 2016, and at 100% capacity in the remaining months of the year.

The selling price for the period from 1.1.2016 to 31.7.2016 was fixed at Rs 69 per unit. The Company has been monitoring the profitability and revising the selling price to meet its annual profit target of Rs 8, 00,000. You are required to suggest the selling price per unit for the period from 1.8.2016 to 31.12.2016.

Prepare Cost Sheet clearly showing the total and per unit cost and also profit for the period:

1. From 1^st Jan. to 31^st July, 2016, and

2. From 1^st Aug. to 31^st Dec, 2016.

Solution: 4

Illustration: 5

X Ltd. provides you the following figures for the year 2015-16:

Particulars	Rs
Direct Material	3,20,000
Direct Wages	8,00,000
Production Overheads (25% variable)	4,80,000
Administration Overheads (75% Fixed)	1,60,000
Selling and Distribution Overheads (2/3^rd Fixed)	2,40,000
Sales @ Rs 125 per unit	25,00,000

For the year 2016-17, it is estimated that:

1. Output and sales quantity will increase by 20% by incurring additional Advertisement Expenses of Rs 45,200.

2. Material prices will go up 10%.

3. Wage Rate will go up by 5% along with, increase in overall direct labour efficiency by 12%.

4. Variable Overheads will increase by 5%.

5. Fixed Production Overheads will increase by 33¹/₃%

Required:

(a) Calculate the Cost of Sales for the year 2015-2016 and 2016-2017.

(b) Find out the new selling price for the year 2016-2017 -

i. If the same amount of profit is to be earned as in 2015-2016.

ii. If the same percentage of profit to sales is to be earned as in 2015-2016.

iii. If the existing percentage of profit to sales is to be increased by 25%.

iv. If Profit per unit Rs 10 is to be earned.

Solution: 5

Illustration: 6

The following are the costing records for the year 2016 of a manufacturer:

Production - 10,000 units; Cost of Raw Materials - Rs 2,00,000; Cost of Direct Labour - Rs 1,20,000; Factory Overheads - Rs 80,000; Office Overheads - Rs 40,000; Selling Expenses - Rs 10,000; Rate of Profit - 25% on the Selling Price.

The manufacturer decided to produce 15,000 units in 2017. It is estimated that the cost of raw materials will increase by 20%, the cost of direct labour will increase by 10%, 50% of the overhead charges are fixed and the other 50% are variable. The selling expenses per unit will be reduced by 20%. The rate of profit will remain the same.

Prepare a Cost Statement for the year 2016 and an Estimated Cost Statement for the year 2017 showing the total profit and selling price per unit.

Solution: 6

Illustration: 7

From the following particulars relating to the production and sales for the year ended 30^th June, 2021, prepare a cost statement showing therein

(i) Prime Cost;

(ii) Works Cost;

(iii) Cost of Production;

(iv) Cost of Sales; and

(v) Profit per unit:

Particulars	Rs	Rs
Raw materials as on 1.7.2020		12,500
Work-in-progress as on 1.7.2020:
At prime cost	15,000
ADD: Manufacturing expenses	3,000	18,000
Finished goods at cost as on 1.7.2020 (8,000 units)		60,000
Raw materials purchased		1,10,000
Freight on raw materials purchased		5,000
Loss of materials by fire		5,000
Factory expenses		70,000
Chargeable expenses		25,000
Direct labour		1,35,000
Administrative expenses Rs 2 per unit		−
Selling expenses Rs 1 per unit		−
Distribution expenses		15,000
Sale of finished goods (28,000 units)		4,00,000
Raw materials as on 30.6.2021		20,000
Work-in-progress as on 30.6.2021:
At prime cost	10,000
ADD: Manufacturing expenses	8,000	18,000
Finished goods as on 30.6.2021 (10,000 units)		?

Assume sales are made on FIFO basis.

Solution: 7

Illustration: 8

General Electricals Ltd. manufactures one product. A summary of its activities for 2020 is as follows:

Particulars	Units	Rs
Sales	80,000	8,00,000
Material inventory:
as on 1.1.2020		40,000
as on 31.12.2020		32,000
Work-in-progress inventory:
as on 1.1.2020		55,000
as on 31.12.2020		72,000
Finished goods stock:
as on 1.1.2020	16,000	64,000
as on 31.12.2020	24,000	−
Material purchases		1,52,000
Direct labour		1,45,000
Manufacturing overheads		1,08,000
Selling expenses		50,000
General and administration expenses		40,000

Prepare a cost sheet showing:

(i) The total cost of goods manufactured (finished), the number of units manufactured (finished) and the cost per unit.

(ii) The cost of goods sold for the year presuming the company uses the LIFO inventory costing method for its finished goods inventory.

Solution: 8

Illustration: 9

The following figures were extracted from the Trial Balance of a company as on 31^st December, 2022.

Particulars	Debit (Rs)	Credit (Rs)
Inventory of Raw Materials	1,40,000
Inventory of WIP	2,00,000
Inventory of FG	80,000
Office Appliances	17,400
Plant and Machinery	4,60,500
Buildings	2,00,000
Sales		7,68,000
Sales Returns	14,000
Materials Purchased	3,20,000
Freight on Materials	16,000
Purchases Returns		4,800
Direct Labour	1,60,000
Indirect Labour	18,000
Factory Supervision	10,000
Factory Repairs and Upkeep	14,000
Heat, Light and Power	65,000
Rates and Taxes	6,300
Miscellaneous Factory Exp.	18,700
Sales Commission	33,600
Sales Travelling	11,000
Sales Promotion	22,500
Distribution Salaries	18,000
Office Salaries	8,600
Interest on Borrowed Funds	2,000

Further details are given as follows:

1. Closing inventories are Material Rs 1, 80,000, WIP Rs 1, 92,000 and FG Rs 1, 15,000.

2. Accrued expenses are Direct Labour Rs 8,000, Indirect Labour Rs 1,200 and Interest Rs 2,000.

3. Depreciation should be provided as 5% on Office Appliances, 10% on Machinery and 4% on Buildings.

4. Heat, light and power are to be distributed in the ratio of 8:1:1 among factory, office and distribution respectively.

5. Rates & taxes apply as 2/3rd to the factory and 1/3rd to office.

6. Depreciation on building to be distributed in the ratio of 8:1:1 among factory, office and distribution respectively.

Prepare a Cost Sheet showing all important components and also a condensed P & L Account for the year.

Solution: 9

Illustration: 10

The Northshire Hospital Trust operates two types of specialist X-Ray Scanning Machines: XR1 and XR50. Details for the next period are estimated as follows:

Particulars	Machine
Particulars	XR1	XR50
Running hours	1,100	2,000
Variable running costs (excluding cost of plates)	27,500	64,000
Fixed costs	20,000	97,500

A brain scan is normally carried out on machine type XR1; this task uses special X-Ray Plates costing Rs 40 each and takes 4 hours of machine time. Because of the nature of the process, around 10% of the scans produce blurred and therefore useless results.

Required:

a) Calculate the cost of a satisfactory brain scan on machine type XR1;

b) Brain scans can also be done on machine type XR50 and would take only 1.8 hours per scan with a reduced rejection rate of 6%. However, the cost of X-Ray Plates would be Rs 55 per scan.

Advice which type of X-Ray machine should be used, assuming sufficient capacity is available on both types of machine.

Solution: 10

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Thursday, February 03, 2022

Cost Accounting - Cost Sheet

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