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COST SHEET
DR. N.K.GUPTA
What is Accounting
Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least, of a financial character and interpreting the result thereof.
Different types of Accounting1. FINANCIAL ACCOUNTING: In financial
Accounting daily transactions are recorded through entries, ledgers are prepared, after a certain period trial balance is prepared and finally the final accounts.
2. MANAGEMENT ACCOUNTING :It is used by Management to control Expenses, to planning purpose and for the purpose of decision making so that it may maximize the profit of business.
1. TAX ACCOUNTING: Though, final accounts show the income or loss of the business even then due to the reason of different tax structures and Acts prevailing in every country, tax accounting is necessary.
2. COST ACCOUNTING: In it, all expenses whether related to production or sale are analyzed so that per unit cost in production may be known.
Definition of Cost Accounting
“Cost accounting is the process of accounting for cost which begins with the recording of income and expenditure and ends with the preparation of periodical statements and reports for ascertaining and controlling cost.”
Walter W.Biggs
Cost Accounting is a part of financial accounting in which expenses are classified, recorded, allocated so that per unit cost of produced commodities and services may be ascertained.
The derived data is used to control the business activites for maximization of profit and to formulate policies.
Comparison of Final and Cost Accounts
1. OBJECT- Final accounts are prepared to know the total cost, total sale and total profit/loss while cost accounting purports separate product wise cost, product wise sales and product wise profit and loss.
2. INFORMATION INTERVAL - Financial accounts show the profit loss and financial position at the end of the particular period while cost accounting shows profit/ loss and cost of each product at any time.
4. REALITY OF EXPENSES – In financial accounts all direct and indirect expenses are real while in cost accounting indirect expenses are estimated on some bases.
Eg. electricity expenses of each department are put to cost on the basis of unit consumes by each department
3. PRICE DETERMINATION - Through the process of financial accounting the determination of selling price of any product is difficult but through the process of cost accounting the determination of selling price of any product is reliable.
MEASURE OF CONTROL
Financial accounts cannot be used as measure of cost control but cost accounting is so used.
VALUATION OF STOCK
In financial accounts stocks are valued at cost or market value whichever is less while in cost accounting stocks are valued mostly at cost.
Limitations of Final accounts
Lack of control over raw materials.
No proper accounting of wages or labour
Difficulty in deciding prices and non availability of production cost separately
Direct and indirect expenses are not defined separately
Decision making for Production Standard is difficult.
No day to day cost information available
Non availability of cost data
No complete analysis of Losses.
Aims and objectives of Cost Accounts Ascertainment of cost
Determination of selling price
Cost control and cost reduction
Ascertaining the profit of each activity
Assisting management in decision making
Determining and controlling efficiency.
Functions of Cost Accounts
Calculation, classification, determination and analysis of cost
Controlling cost Matching cost with revenues Other functions
Advantage and Importance of Cost Accounts Advantages to producers and management
Advantages to labourers
Advantages to investors and Creditors.
Advantages to Customers.
Advantages to Nation.
Different types of Cost Accounting Uniform costing Method Contract Costing Process Costing Method Departmental Costing Operating Cost System Multiple Cost System Batch Costing Standard Costing System Marginal Costing System
Characteristics of Ideal System of Cost Accounting
Simplicity Economical Favorable to business Elasticity Accuracy and clean Presentation Proper Classification and Analysis Reconciliation
Methods of calculating unit cost
Unit Costing
“Single or output cost system is used in businesses where a standard product is turned out and it is desired to find out the cost of a basic unit of production”
– J.R.Batliboi
Objects of Unit Costing
To determine per unit cost and total cost of production.
To know detailed per unit cost Calculating the variation in cost and
determining the reasons for variation and comparing.
To decide the price of production
The Expenditure, which has been incurred upon production for a period is extracted from the financial books and store records, and set out in memorandum statement. If this period statement is confined to the disclosure of cost of units produced during the period, then it is termed as COST SHEET.
Cost sheet Statement of cost and statement of profit Production Account Trading & profit & loss A/c & Working A/c
COST SHEET
It presents an analytical statement of expenses of production by which per unit cost of production and different overheads are known.
-WALTER W. BIGG
Cost Sheet reveals…. Units produced during particular period Direct material,direct labor & other
direct expenses incurred during particular period
Estimation & allocation of different overheads
Relation between different components of cost
Comparison of old records
Advantages of Cost Sheet
Per unit and total cost of production can be known
Determination of SELLING PRICE Cost control
Cost Sheet & Apparel Industry
Production of fabric Production of trims Production of Finished garments Helps in calculating Price Price negotiation with buyers Controlling costs
Basis Cost Sheet Cost A/c
Form Statement Account
Rules Memorandum of particulars
Double entry statement
When Work unfinished Work completed
Use Comparison with Financial account
Comparison with Financial accounts
Nature Analytical Precise
Use Controlling cost Controlling cost
Elements of Cost and their Classifications
The total cost is divided into Material cost Labour cost Other expenses
DIRECT EXPENSES INDIRECT EXPENSES
DIRECT MATERIAL
DIRECT LABOUR
OTHER CHARGEABLE EXPENSES
FACTORY EXPENSES
OFFICE EXPENSES SELLING AND DISTRIBUTION EXPENSES
ELEMENTS OF COST
DIRECT MATERIAL:
Material which is primarily used for manufacturing of the product and thus becomes as the organ of that product, as wood is to furniture.
DIRECT LABOUR:
Those workers who take active part in the process of production and who are utilised for changing the shape of material into production, wages paid to them is direct labour, as carpenter is to furniture.
Direct Expenses:
They are those which can without difficulty be identified as being incurred wholly for a particular unit of cost. The important direct expenses are:
Direct Expenses
1. Excise Duty
2. Royalty
3. Architect’s and Surveyor’s fees
4. Expenses of designing and drawings of patterns
5. Experimental Expenses
6. Hire Charges
7. Repair and maintenance of the equipment
8. Travelling expenses to the site
Indirect Expenses INDIRECT MATERIAL:
Material that is auxiliary to production but is spent for the whole enterprise and not for a special unit. For eg. Lubricating oil for machines.
INDIRECT LABOUR:
The labour that is not directly utilised in the process of production. Eg. Watchman’s salary.
Indirect Charges/ Expenses/ Overheads
They are not directly related to production units but these are supplementary expenses done for the whole unit.
Works/ Factory/ Mill/ Shop/ Foundry/ Manufacturing expenses
These expenses are concerned with production or factory. They are also known as works on cost or works overhead.
Works on CostWorks on Cost Indirect materials – nuts, bolts, rags Indirect Labour – store keeper’s salary Gas, steam, power, fuel, coal, water,
haulage, lighting and heating. Rent, rate, taxes and insurance. Works manager’s salary Depreciation and repairs Loose tools Stores overheads
Buying expenses Labour welfare expenses – P.F. Contribution to technical journals Research expenses Training Expenses Supervision and testing expenses Cost of rectifying defective work
Office/ administration/ Establishment Expenses/ Overheads
1. Officer’s Salary
2. Director’s fees
3. Office rent, rate, taxes, insurance, lighting and cleaning
4. Office stationery, telephone, postage
5. Depreciation on office equipment
6. Auditors’ fees
7. Bank Charges
8. Subscription to trade journals
Selling and Distribution Expenses/ Overheads
1. Travelling Expenses
2. Salesman’s Salary and commission
3. Discount, trade discount, cash discount allowed
4. Sample expenses
5. Branch expenses
6. Expenses on catalogue and price lists
7. Insurance and taxes on finished goods
8. Showroom Expenses
9. Packing expenses
10. Carriage outward and loading charges
11. Warehouse expenses
12. Delivery van expenses
13. Bad debts
14. Advertisements
15. Collection charges
Items to be excluded from cost books
1. Abnormal wastage of time and material
2. Abnormal Expenses3. Interest on Capital4. Interest on loans, Cash Credit,
O/D5. Capital Expenditures
6. Income tax
7. Dividends
8. Discounts on shares and debentures
9. Appropriation of profits
10. Writing off expenses
11. Cash Discount
Specimen of a Cost Sheet
Cost Sheet for XYZ Co. For The month of ………..2008
Output……..Units
ParticularsLast Period Current Period
Total Cost Total CostPer Unit Cost
Per Unit Cost
Cost Sheet for XYZ Co. For The month of ………..2008
Output……..Units
ParticularsLast Period Current Period
Total Cost Total CostPer Unit Cost
Per Unit Cost
Direct Material consumedDirect WagesOther direct expensesAdd: Factory overheadsFactory Cost (Gross)Add: Op. WIPLess: Clg. WIPFactory Cost(Net)Add: Admn. OverheadsCost of ProductionAdd: Op. Finished GoodsLess: Clg. Finished Goods
Cost Sheet for XYZ Co. For The month of ………..2008
Output……..Units
ParticularsLast Period Current Period
Total Cost Total CostPer Unit Cost
Per Unit Cost
Cost of goods soldAdd: Selling overheadsCost of SalesAdd: Profit as % of Cost or Selling priceSales Revenue (Total)
A Case Of Cost Sheet Preparation
Orient Craft Ltd.Expenditure incurred in manufacturing 10000 units of Basic polo T-shirts for the month ending on 31 Jan 2008:
Raw Material 28000
Fuel 6900
Electric power 1340
Wages 63500
Repairs 2400
Sampling 1060
Light & water 400
Rent 2000
Rates and insurance 300
Office salaries and
general expenses 7000
Administration of office 5000
Depreciation on
machinery 2500
Cost Sheet for Orient Craft Ltd Co. For the month of 31st Jan 2008 Output 1000 Units
ParticularsCurrent Period
Total Cost Per Unit Cost
Raw materials 28,000 28.00
Wages 63,500 63.50
PRIME COST 91,500 91.50
Add: Works Expenses
Fuel 6,900 6.90
Electric power 1,340 1.34
Repairs 2,400 2.40
Sampling expenses 1,060 1.06
Cost Sheet for Orient Craft Ltd Co. For the month of 31st Jan 2008 Output 1000 Units
ParticularsCurrent Period
Total Cost Per Unit Cost
Light & water 400 0.40
Rent 2,000 2.00
Rates & insurance 300 0.30
Depreciation 2,500 16,900 2.50 16.90
WORKS COST 1,08,400 108.40
Add: Office On cost
Office salary 7,000 7.00
Admn. expenses 5,000 12,000 5.00 12
Cost Sheet for Orient Craft Ltd Co. For the month of 31st Jan 2008 Out put 1000 Units
ParticularsCurrent Period
Total Cost Per Unit Cost
TOTAL COST 1,20,400 120.40
Add:Profit(15% on cost) 18,060
SALES PRICE 1,38,460 138.46
Statement of Cost, Profit & Loss
Statement of Cost, Profit & Loss is prepared as the cost sheet is prepared. The only difference is that in it, like cost sheet, per unit cost is not calculated only total cost is prepared.
Defective & rejected work
Sale of such units is deducted from total cost
But, cost of repairing such units is added to cost of production under the name of Additional Works overheads
Production A/c
Production A/c
The term production account is used to denote a particular form of manufacturing A/c prepared in conjunction with the financial accounts in order to show the actual cost of producing the goods manufactured during the period under review.These accounts may be drawn up at short interval Eg Monthly.
-G R Glower & R G Williams
Application of production A/c
Production A/c for Coke and coal Companies
Production A/c for yarn and fabric production Companies
Case on Production A/c
Swadeshi Cotton Mills Ltd.Prepare Production A/c for the half year ended on 30 June 2008.
OS yarn at cost(60,000 kg) Rs 30,000OS fabric at cost(1,20,000 kg) Rs 90,000Spinning wages Rs 30,000, Stores Rs 20,000Fuel Rs 10,000, Yarn sales(2,00,000 kg) Rs 40,000CS of yarn at cost(2,00,000 kg) Rs 41,000CS of fabric at cost(2,05,000 kg) Rs 1,50,000Cotton purchased(10,40,000kg) 2,60,000Weaving wages 60,000
Stores- weaving Rs 40,000
Fuel weaving-Rs 10,000
Sales of wastage (2,11,000 kg) Rs 29,000
Fabric sales (4,20,000 kg) Rs 3,00,000
Stores consumed increased the weight of production by 4,000 kg for spinning and 1,20,000 kg for weaving
Particulars Wt(kg) Amt Particulars Wt(kg) Amt
To cotton 1040000 260000 By sales waste 211000 29000
To stores 4000 20000 By cost of prod 833000 291000
To fuel 10000
To wages 30000
1044000 320000 104400 320000
To op stock 60000 30000 By sales 200000 40000
To cost of prod
833000 291000 By cloth prod* 493000 177215
By Clg stock 200000 41000
By profit & loss (loss)
62785
893000 321000 893000 321000
Yarn Production A/c
Particulars Wt(kg) Amt Particulars Wt(kg) Amt
To yarn prod 4930000 177215 By loss in wt 108000
To stores 120000 40000 By cost of prod 505000 287215
To wages 60000
To fuel 10000
613000 287215 613000 287215
To op stock 120000 90000 By sales 420000 300000
To cost of prod 505000 287215 By clg stock 205000 150000
To gross profit
625000 450000 625000 450000
Fabric Production A/c
* Working notes:
Op stock 60000
+ Production 833000
- Sales 200000
- Closing stock 200000 = 4,93,000 kg transferred to cloth prod A/c.
Valuation
cost of 893000 kg is Rs 3,21,000
=> cost of 493000 kg is Rs 1,77,215
Trading & Profit & Loss A/c Or Working A/c
Working A/c It is prepared just like production account. But
the production A/c shows only the production cost but not the other items. Working A/c is distributed into 6 parts:
1. Prime cost2. Work cost3. Production cost4. Cost of goods sold5. Cost of sales6. Net profit
Tender Pricing
Tender Pricing
If any organization wants to purchase goods in bulk, then it wants information from the suppliers for rates and terms of supply and quality of product. The suppliers send their tenders and the buyer selects the most beneficial supplier in terms of cost and quality. It is also known as Bid pricing.
Case in tender pricing
Bhagwan Das & sons, Carpet manufacturers
The firm wants to send a tender for sale of 3000 carpets. It is estimated that materials will cost Rs 10000, wages Rs 6000.The works on cost and office and general on cost would bear the same percentage which works on cost bears to the productive wages and general on cost to the works cost in the manufacture of carpets in the last 6 months. The firm wants a net profit of 20% on selling price.
The cost of materials and expenses incurred in the last 6 months ending on 30 June 2008 on the manufacture of carpets is:
Op stock of finished goods 28000
Op stock of Raw material 12800
Purchase of raw material 292000
Wages 198800
Sales of finished goods 592000
Clg stock of finished goods 30000
Clg stock of Raw material 13600
Works overheads 43736
Office and general charges 35524
Particulars Rs. Rs .
Op stock of raw materials 12800
Add: Purchases 292000
304800
Less: Closing stock 13600
Cost of material used 291200
Add: Wages 198800
PRIME COST 490000
Add: Works overheads 43736
Cost sheet for the six months ended on 30th June 2008
Particulars
FACTORY COST 533736
Add: Office and general expenses 35524
TOTAL COST 569260
Add: Op stock Finished Goods 28000 597260
Less Clg. stock Finished Goods 30000
COST OF GOODS SOLD 567260
PROFIT 24740
SALES 592000
Particulars Rs
Materials 10000
Wages 6000
PRIME COST 16000
Work on cost (22% on wages)* 1320
WORKS COST 17320
Office & general on cost (6.656% on work cost)
1153
TOTAL COST 18473
Profit (20% on SP) 4618
TENDER PRICE 23091
Tender for 3000 carpets
* Working notes
% age of works on cost to wages =
(43,736/198800)*100 = 22% % age of office & general on cost to
factory cost = (35524/533736)*100 = 6.656%
PRICING METHODS
THE PRICE OF A PRODUCT IS INFLUENCED BY A LARGE NUMBER OF FACTORS LIKE….
Costs Non – Cost Factors
Nature of industryProduct characteristicsCompetitionPurchasing power of customersSupply elasticity Economic ConditionsAvailability of substitutesGovernment policiesManagement policies
Pricing in different markets
Perfect Competition Monopoly Oligopoly Imperfect Competition
Why to Study Pricing in Costing????
Because….
It helps the management in DECISION MAKING by providing various kinds of
information such as……..
Detailed cost analysis Future costs in form of tender pricing Effect of demand, competition, price
changes on profitability Actual profits V/s Projected profits Return on capital employed Effect of price differential
Pricing decisions are required when… New product is launched Quotations / bids to be made Product is yielding less profit Resistance in the market for the
product
Pricing methods based on costs
Full Cost / Total Cost Method
Selling price is determined as total costs plus mark up to cover profit.To arrive at the selling price, selling, distribution, and administration overhead and an estimated or desired percentage of profit is added to the total factory cost.
Application
Cost Plus Contracts New products with no established
markets Insignificant competition
Full cost Method
ADVANTAGES
Long term pricing
Safest method
DISADVANTAGES
Ignores Elasticity of demand
Ignores competition
Fluctuating costs of inputs ignored
Arbitrary nature of elements of cost
Conversion cost method
Total costs minus cost of material input cost method of pricing is based on the contention that because materials do not earn any profit, the profits should be related to the services performed, that is the value added in form of conversion cost.
Return on Investment Methods This method takes into account the capital
employed for financing the production and sales of production. The formula for fixing the SP which will yield desired return on capital
P = [(C+xF)/U] / (1-xV) Where P= Selling Price C= Total cost x = Rate of Return on capital (desired)
F = Fixed Assets V= Variable capital
U = Annual sales (units)
Marginal Cost Method
A flexible approach and is particularly used in short term pricing.
Lowering of Prices may increase demand and revenue but the cost may increase if, for instance, overtime is worked to meet increased demand, so that this may result in overall reduction of profit.
Differential Costs Methods
Differential cost analysis reveals that a lower price is acceptable so long as the extra revenue is able to meet the additional cost and also earn some profit, provided this does not disturb the market.
Standard Cost Method
Price decisions are made on the basis of standard costs and they are revised before any pricing decisions. Standards provide a basis for various analysis.
Learning Curve Method
It is for the products that have large and costly non repeat orders of varying sizes. This method takes the efficiency factor of workers into account.
