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Meaning of Cost Accounting:Cost Accounting is a process of collecting, Analyzing, summarizing & evaluating various alternatives courses of action.

Unlike the accounting system that help in the preparation of financial report periodically. The cost accounting systems & reports are not subject to rules & standards, it is generally accepted Accounting rules & Principles.

Meaning of Cost Sheet:Cost sheet is a statement of cost. In other words, when costing information are set out in the form of a statement, it is called 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 prepared on the basis of :

1. Historical Cost

2.

Estimated Cost

1. Historical Cost:Historical Cost sheet is prepared on the basis of actual cost incurred. A statement of cost prepared after incurring the actual cost is called Historical Cost Sheet.

2. Estimated Cost:Estimated cost sheet is prepared on the basis of estimated cost. The statement prepared before the commencement of production is called estimated cost sheet. Such cost sheet is useful in quoting the tender price of a job or a contract.

Importance of Cost Sheet

1.

Cost ascertainment The main objective of the cost sheet is to ascertain the cost of a product. Cost
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sheet helps in ascertainment of cost for the purpose of determining cost after they are incurred. It also helps to ascertain the actual cost or estimated cost of a Job.

2.

Fixation of selling price To fix the selling price of a product or service, it is essential to prepare the cost

sheet. It helps in fixing selling price of a product or service by providing detailed information of the cost.

3.

Help in cost control For controlling the cost of a product it is necessary for every manufacturing

unit to prepare a cost sheet. Estimated cost sheet helps in the control of material cost, labour cost and overheads cost at every point of production.

4.

Facilitates managerial decisions It helps in taking important decisions by the management such as: whether

to produce or buy a component, what prices of goods are to be quoted in the tender, whether to retain or replace an existing machine etc.

Classification of Cost:1. By Elements 2. By Functions 3. By Behaviour

1. By Elements:a. Material:The substance from which the product is made is known as material. It may be in a raw or a manufactured state. It can be direct as well as indirect.

Direct Material: - All material which becomes an integral part of the finished product and

which can be conveniently assigned to specific physical units is termed as Direct Material. Following are some of the examples of direct material:(i) All material or components specifically purchased produced or requisitioned from stores. (ii) (iii) Primary packing material (e.g. cartoon, wrapping, cardboard, boxes etc.) Purchased or partly produced components.

Direct material is also described as raw-material, process material, prime material, production material, stores material, constructional material etc.
Indirect Material: - All material which is used for purposes ancillary to the business and

which cannot be conveniently assigned to specific physical units is termed as Indirect Material. Consumable stores, oil and waste, printing and stationery etc. are a few examples of indirect material Indirect material may be used in the factory the office or the selling and distribution division. b. Labour:- For conversion of materials into finished goods, human effort is needed such human effort is called labour. Labour can be direct as well as indirect.

Direct labour: - Labour which takes

an active and direct part in the production of a

particular commodity is called labour. Direct labour costs are, therefore specially and conveniently traceable to specific products. Direct labour is also described as process labour, productive labour, operating labour, manufacturing labour, direct wages etc.
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Indirect labour:- labour employed for the purpose of carrying out tasks incidental to goods

or services provided, is indirect labour such labour

does not alter the construction,

composition or condition of the product. It cannot be practically traced to specific units of output wages of store keepers, foreman, time keepers, directors, fees, salaries of salesmen, etc. are all examples of indirect labour costs. Indirect labour may relate to the factory the office or the selling and distribution division. c. Expenses:Expenses may be direct or indirect.
Direct expenses: - These are expenses which can be directly, conveniently and wholly

allocated to specific cost centers or cost units. Examples of such expenses are: hire of some special machinery required for a particular contract, cost of defective work incurred in connection with a particular job or contract etc. Direct expenses are sometimes also described as chargeable expenses.
Indirect expenses:- these are expenses which cannot be directly, conveniently and wholly

allocated to cost centers or cost units. 2. By Functions:a. Manufactuirng Cost i. ii. Prime Cost Overhead

b. Non-manufacturing Cost i. ii. Administration Cost Selling & Distribution Cost

a. Manufacturing Cost:i. Prime Cost:It consists of direct material, direct wages and direct expenses. In other words Prime cost represents the aggregate of cost of material consumed, productive wages,
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and direct expenses. It is also known as basic, first, flat or direct cost of a product.

Prime Cost = Direct material + Direct Wages + Direct expenses

Direct material means cost of raw material used or consumed in production. It is not necessary that all the material purchased in a particular period is used in production. There is some stock of raw material in balance at opening and closing of the period. Hence, it is necessary that the cost of opening and closing stock of material is adjusted in the material purchased. Opening stock of material is added and closing stock of raw material is deducted in the material purchased and we get material consumed or used in production of a product. It is calculated as : Material Consumed = Material purchased + Opening stock of material Closing stock of material.

ii.

Overhead Cost:Such indirect expenses which are incurred in the factory and concerned

with the running of the factory or plant are known as manufacturing expenses. Expenses relating to production management and administration are included there in. Following are a few items of such expenses: Rent, rates and insurance of factory premises, power used in factory building, plant and machinery etc. b. Non-Manufacturing Cost:i. Administration Cost:These expenses are not related to factory but they pertain to the management and administration of business such expenses are incurred on the direction and control of an undertaking example are :- office rent, lighting and heating, postage and telegrams, telephones and other charges; depreciation of office building, furniture and equipment, bank charges, legal charges, audit fee etc.

ii.

Selling & Distribution Cost:Expenses incurred for marketing of a commodity, for securing

orders for the articles, dispatching goods sold, and for making efforts to find and retain customers are called selling and distribution expenses examples are:Advertisement expenses cost of preparing tenders, traveling expenses, bad debts, collection charges etc. Warehouse charges packing and loading charges, carriage outwards, etc.

3. By Behaviour:a. Variable Cost b. Fixed Cost c. Semi-variable Cost/Semi-Fixed Cost

a. Variable Cost:Some Cost behave in total with the volume in a same way that means volume & value will vary in the same proportion & they are called as VARIABLE COST. In other words variable cost vary in total irrespective of the volume were as remains p/u constant. Example:- Direct Material, Direct labour b. Fixed Cost:Some costs do not behave with the volume i.e. Total Cost remain Constant irrespective of volume Change. In other words fixed cost remains constant in total but varies p/u. Example:- Rent of the Building, salary of a supervisor

c. Semi-Variable Cost/Semi-Fixed Cost:Some cost behave proportionally with the volume & some part will remain constant i.e. some cost vary with the volume in the same proportion were as some cost will remain constant irrespective of volume variation. Example:- Electricity Bill. This cost is . called SEMI-VARIABLE OR SEMI-FIXED COST.

Semi-variable or Semi-fixed cost are ultimately to be added into variable cost(variable portion of the cost) & fixed cost, were by the semi-variable cost is been merged into variable & fixed cost

COST SHEET FORMAT Amount Amount *** *** *** *** *** *** *** ***

Particulars Opening Stock of Raw Material Add: Purchase of Raw materials Add: Purchase Expenses Less: Closing stock of Raw Materials Raw Materials Consumed Direct Wages (Labour) Direct Charges Prime cost (1) Add :- Factory Over Heads: Factory Rent Factory Power Indirect Material Indirect Wages Supervisor Salary Drawing Office Salary Factory Insurance Factory Asset Depreciation Works cost Incurred Add: Opening Stock of WIP Less: Closing Stock of WIP Works cost (2) Add:- Administration Over Heads:Office Rent Asset Depreciation

*** *** *** *** *** *** *** *** *** *** *** ***

*** ***

General Charges Audit Fees Bank Charges Counting house Salary Other Office Expenses Cost of Production (3) Add: Opening stock of Finished Goods Less: Closing stock of Finished Goods Cost of Goods Sold Add:- Selling and Distribution OH:Sales man Commission Sales man salary Traveling Expenses Advertisement Delivery man expenses Sales Tax Bad Debts Cost of Sales (5) Profit (balancing figure) Sales

*** *** *** *** *** *** *** *** ***

*** *** *** *** *** *** *** *** *** ***

Components Of Cost Sheet:1. Prime Cost:It consists of direct material, direct wages and direct expenses. In other words Prime cost represents the aggregate of cost of material consumed, productive wages, and direct expenses. It is also known as basic, first, flat or direct cost of a product.

Prime Cost = Direct material + Direct Wages + Direct expenses

Direct material means cost of raw material used or consumed in production. It is not necessary that all the material purchased in a particular period is used in production. There is some stock of raw material in balance at opening and closing of the period. Hence, it is necessary that the cost of opening and closing stock of material is adjusted in the material purchased. Opening stock of material is added and closing stock of raw material is deducted in the material purchased and we get material consumed or used in production of a product. It is calculated as :

Material Consumed = Material purchased + Opening stock of material Closing stock of material.

2. Factory Cost:In addition to prime cost it includes works or factory overheads. Factory overheads consist of cost of indirect material, indirect wages, and indirect expenses incurred in the factory. Factory cost is also known as works cost, production or manufacturing cost.

Factory Cost = Prime cost + Factory overheads

3. Adjustment for stock of W.I.P.:In the process of production, some units remain to be completed at the end of a period. These incomplete units are known as work-in-progress. Normally, the cost of incomplete units includes direct material, direct Labour, direct expenses, and average factory overheads. Hence, at the time of computing factory cost, it is necessary to make adjustment of opening and closing stock of work in progress to arrive at the net Factory cost/works cost.

4. Cost of Production:If office and administrative overheads are added to factory or works cost, total cost of production is arrived at. Hence the total cost of production is calculated as:

Total Cost of production = Factory Cost + office and administration overheads

5. Cost of Goods Sold:It is not necessary, that all the goods produced in a period are sold in the same period. There is stock of finished goods in the opening and at the end of the period. The cost of opening stock of finished goods is added in the total cost of production in the current period and cost of closing stock of finished goods is deducted. The cost of goods sold is calculated as: Cost of goods sold = Total cost of production + Opening stock of Finished goods Closing stock of finished goods

6. Cost of Sales:If selling and distribution overheads are added to the total cost of production, total cost is arrived at. This cost is also termed as cost of Sales. Hence the total cost is calculated as:

Total Cost = Cost of Goods sold + Selling and distribution overheads

7. Sales:If the profit margin is added to the total cost, sales are arrived at. Excess of sales over total cost is termed as profit. When total cost exceeds sales, it is termed as Loss. Sales = Total Cost + Profit

While Preparing the cost sheet, the following income & expenses are not considered because such items do not form a part of the cost
1. Financial Incomes 2. Financial Charges or Non-cost Expenses

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1. Financial Incomes:a. Abnormal Gains b. Profit on sale of Fixed Assets c. Interest On Investment d. Interest On Bank Deposit e. Dividend Received f. Rent Received

2. Financial Charges or Non-Cost Expenses:a. Income Tax b. Interest On Loan c. Interest On Capital Contributed By The Owners d. Donations e. Capital Expenditures f. Loss On Sales Of Fixed Asset g. Goodwill Returned Off h. Underwritten Commission i. Dividend to Shareholder j. Provision for Doubtful Debt k. Bonus to Shareholder l. Preliminary Expenses m. Excess Depreciation n. Cash Discount o. Fines & Penalties p. Charity q. Abnormal loss

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Prepare cost sheet in the book of M. B. Rehman from the following particulars. Opening stock: Closing stock: Raw material Finished goods Raw material Finished goods Raw material purchased Wages paid to laboures Chargeable expenses Rent and Taxes Power Experimental expenses Sale of wastage of material Office management salary Office printing & stationery Salaries to salesman Commission to traveling agents Sales = = = = = = = = = = = = = = = = Rs 5,000 Rs 4,000 Rs 4,000 Rs 5,000 Rs 50,000 Rs 20,000 Rs 2,000 Rs 7,400 Rs 3,000 Rs 600 Rs 200 Rs 4,000 Rs 200 Rs 2,000 Rs 1,000 Rs 1, 00,000

Solution:-

Book of B. M. Rehman
Cost sheet
Particular Raw material purchased Add:- Opening stock of raw material Raw material for consumption Less:- closing stock of raw material Raw material consumed Less:- Sale of wastage of materials Add:- Direct labour Add:- Direct chargeable expenses Prime cost Add:- Factory overhead Rent & Taxes Power Experimental charges Details (Rs) 50,000 5,000 --------------55,000 4,000 --------------51,000 200 ------------Amount (Rs)

50,800 20,000 2,000 -------------72,800

7,400 3,000 600 --------------

11,000
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Factory cost Add:- Administrative overhead:Office management salary Office printing & stationery Cost of production Add:- Opening stock of finished goods Goods available for sales Less:- closing stock of finished goods Cost of goods sold Add:- selling and distribution overhead:Salaries of salesman Commission to traveling agent Cost of sales Profit Sales

83,800 4,000 200 ---------------

4,200 88,000 4,000 ------------92,000 5,000 ------------87,000

2,000 1,000 --------------

3,000 90,000 10,000 -------------1,00,000

INTER RELATION OF EACH AND EVERY COMPONENT

Firstly we will find prime cost;

Prime cost = Direct material + Direct labor + Direct expenses

When factory overheads are added to prime cost, it is coming as factory cost.

(Factory cost = Prime cost + Factory overheads)

Factory cost plus office administrative expenses, it is coming as cost of production.

(Cost of production = Factory cost + Office administrative expenses)

Cost of production, if I add to it, selling and distribution expenses, my total cost come
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(Total cost = Cost of production + Selling and distribution expenses)

if I load profit percentage into it, it will give me sales figure. (Sales = Total cost + Profit percentage)

So this is what we call as a cost sheet format. This is a very simple cost sheet format.

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