What is Cost Sheet? Components, Advantages, Treatment and Adjustments

What is Cost Sheet?

A cost sheet is a document or statement that provides detailed information about the various costs incurred in the production or manufacturing of a product or service. It is an essential tool for businesses to track and analyze their expenses, determine the cost of production, and make informed decisions regarding pricing, profitability, and cost control.

Cost sheet or the statement of cost is a comprehensive statement of cost that indicates the detailed cost and cost per unit of a product. Under different costing methods, this is known as unit costing method.

Important Components of Cost Sheet

The important components of cost sheet are as follows:

Prime Cost

It is the sum of total direct costs and includes cost of material actually consumed for a product in a particular time period. Direct labor cost including the amount payable (due but not paid) and other direct expenses during the period. Therefore,

Direct material consumed + Direct labor cost + Direct expenses = Prime cost

Factory Cost or Works Cost

In the prime cost as discussed previously, if we add factory overheads, it will give you total factory cost. It means that the cost of a product up to the process at factory. This is also known as factory cost gross. In this gross factory cost, if we add opening stock of work-in-progress (WIP) and subtract value of closing stock of WIP, we will get the value of net factory cost. Thus,

Prime cost + Factory overheads + Value of opening WIP – Value of closing WIP = Factory cost (net)

Cost of Production

So far we have arrived at factory cost as stated previously but there are administrative expenses also attached to a product and therefore these are also considered while arriving at the cost of production. Therefore, we add all administrative expenses in the factory cost. Thus,

Cost of production = Factory cost + Administrative expenses

This gives the total units produced during the period and the total cost thereof. These units are also called “finished goods.” Remember every firm has the opening stock of finished goods (which is the closing stock of the last period) and also retains certain units as closing stock from the total production. Therefore, to arrive at the net value of finished goods that can be sold or are available for sale for the particular period, we add the units and value of opening finished stock and reduce the number units and value of closing stock.

Thus,

COGS or Cost of goods sold = Cost of production + Value of opening finished stock – Value of closing finished stock

Cost of Sale

It can be noticed that COGS attaches the value of finished stock available for sale and so far we have not considered the selling and distribution expenses that are required to be incurred in selling the available units for sale. To arrive at the cost of sale, all the connected selling and distribution expenses are added to the value of COGS. Thus,

Cost of sale = COGS + Selling and distribution expenses

Selling Price

Once the final value of cost of goods is available per unit, we add the profit margin to fix the selling price. Therefore,

Selling price = Cost of sale per unit × Profit margin (percent) per unit.

Suppose the cost of sale per unit is Rs. 40 and as per firm policy, profit margin is 15%, the selling price per unit will be Rs. 46. Sometimes, the profit is calculated at the selling price. In that case, the percentage of profit is increased on cost per unit.

Profit = Profit percent on sale / (100 Profit percent on sale) × 100

If a firm targets 25% profit on selling price, the profit percent on cost will be

25 / 75 × 100 = 33.33%

Suppose the cost of sale per unit is Rs. 40 and the firm decides 15% profit on the selling price, the profit percentage per unit will be

15 / 85 × 100 = 17.65%

The selling price per unit will be

40 + 17.65% = Rs. 47.06

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Advantages of Cost Sheet

For a firm, following are the advantages of the cost sheet:

• A firm can monitor the cost of product at each stage of production as break-up figure of total cost as well as per unit cost is available in the cost sheet statement.
  
  
• The cost sheet also provides information of the cost in a particular time period. This helps a firm to compare the cost in different intervals of time and check whether the cost escalation is justified.
  
  
• Based on the trends of cost available over a period of time, future projections can be made with certain accuracy.
  
  
• More importantly, it helps a firm to determine selling price in a more reasonable manner as cost sheet considers all components of actual costs.
  
  
• Cost sheet consists of all adjustments such as WIP, opening and closing finished, scrap value from wastage, etc. The cost arrived at on the basis of this is fairly accurate.

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Treatment and Adjustments of Certain Cost Components

There are some specific cost related to transactions that need to be treated separately in the cost sheet to arrive at a far more accurate cost of the product. We will now examine such transactions and their adjustment in cost sheet.

Value of Scrap

Generally scrap or wastage occurs at two places, either at the materials storage place or in the production process. The scrap so occurs is sold and that is called scrap value. The scrap value reduces the cost of production to an extent.

Therefore, the value of scrap is deducted from the direct material cost if the wastage had occurred at material storage place and from the factory cost if the wastage occurred in the production process. Thus, more accurate cost is obtained. If it is not specified where the wastage occurred, the scrap value is deducted from the factory cost as it is generally assumed that wastage happens in the production process.

Suppose the factory cost of a product is Rs. 12.55 lakh and the scrap is sold for Rs. 2 lakh of a particular product, in that case the treatment will be as follows:

• Factory cost: Rs. 12.55 lakh
• Less: Scrap value Rs. 2 lakh
• Net factory cost: Rs. 12.53 lakh

Loss of Material

There may be instances of losses of raw material. Such losses are categorized into two categories: normal loss that occurs in natural process of materials handling and abnormal loss that occurs due to fire, accidents, etc. Normal loss is automatically charged to material cost as no separate treatment is needed, whereas abnormal cost should be deducted from the value of raw material purchased so that effective cost of raw material consumed could be obtained.

Bad Debts

When a sale is made on credit, there happens to be bad debts. The amount of bad debt should be absorbed in selling overheads. Sometimes, bad debts may occur on account of abnormal reasons. In that case, the amount should be debited to profit and loss account.

Trade Discount

It is a part of sales revenue, and the discount offered brings down the value of sales revenue to that extent that it should be deducted from the sales revenue to obtain net sales value.

Packing Charges

Treatment of packing charges depends on the purpose of packing. If packing is essential, it should be added to material costs. If packing is for movement of stock from one place to another during production process, it should be added to factory cost and if it is for transportation purpose, it should be added to selling and distribution expenses. If it is not specified, then it should be added to selling expenses.

Octroi, Customs Duty, Etc.

All costs associated with the purchase of materials including taxes, octroi, customs duty, etc., and carrying costs are included in direct material costs.

Factory Stores

A factory store is a storage room where necessary production process equipment, lubricants and other components required in a routine manner are stored. These components are stored on an ongoing basis to continue the production process. Therefore, the treatment of factory store overheads is done in the following manner:

Opening stock of factory stores

Add: New purchases during the period

Less: Closing value of factory stores components

= Net factory stores to be added to factory overheads

Donations

The treatment of donations is done depending on the purpose of donations. If it helps in boosting the sales of the product, it will be added to selling and distribution expenses otherwise it should be accounted in profit and loss account.

Interest on Capital

Not to be included in the cost sheet. It should be accounted for in the profit and loss account.

The cost sheet is prepared in a particular format, separately showing different components of costs under relative heads. The generally followed format of cost sheet is prescribed in Figure.