Cost Accounting - Cost Sheet (Foundation Level)

 

Cost Accounting

Cost sheet

(Foundation Level)

 

Part A: Discussion of general theories about what is cost sheet, how is it prepared, how is it used in the cost accounting system of a business organisation, what are the benefits it gives to the organisation, etc. along with the required standard format of a cost sheet.

 

Part B: 2 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.

 

Cost sheet for the month of............ (Format)

Particulars	Details (Rs)	Total (Rs)	P. U. (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 exp.)		×××	×××
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 OHs		×××	×××
COST OF PRODUCTION		×××	×××
ADD: Opening stock of finished goods	×××
LESS: Closing stock of finished goods	×××	×××
COST OF GOODS SOLD		×××	×××
ADD: Selling OHs		×××	×××
ADD: Distribution OHs		×××	×××
COST OF SALES / TOTAL COST		×××	×××
ADD: Costing profit		×××	×××
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

vii. 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;

(c)  Selling and distribution overhead recovery rate on the basis of cost of goods sold.

 

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

Cost Accounting

Cost Sheet

Selected Problems

(Foundation Level)

 

Illustration: 1

Prepare a statement of cost from the following data to show material consumed, Prime cost, factory cost, Cost of goods sold and profit.

	1.1.15 (Rs)	31.12.15 (Rs)
Raw materials	60,000	50,000
Work-in-progress	24,000	30,000
Finished goods	1,20,000	1,10,000
Purchase of materials		9,00,000
Wages paid		5,00,000
Factory overheads		2,00,000
Administration overheads		50,000
Selling and distribution overheads		30,000
Sales		20,00,000

 

Click here for Solution: 1 in PDF

 

Illustration: 2

From the following particulars, prepare a cost statement showing the component of total cost and the profit for the year ended 31^st December, 2015.

	1.1.15 (Rs)	31.12.15 (Rs)
Raw materials	40,000	50,000
Work-in-progress	15,000	10,000
Finished goods	6,000	15,000
Purchase of materials		4,75,000
Carriage inward		12,500
Wages paid		1,75,000
Works Manager’s salary		30,000
Fy. Employees’ salaries		60,000
Fy. Rent, taxes and ins.		7,250
Replacement of m/c		10,000
Power expenses		9,500
Other Prodn. Expenses		43,000
General expenses		32,500
Sales for the year		8,60,000
Income tax paid		500
Dividend received		1,000
Debenture interest		5,000
Goodwill written off		10,000
Selling expenses		9,250

 

Click here for Solution: 2 in PDF