Costing equations

Direct Material + Direct Labor + Direct Expenses=Prime Cost

Indirect Material + Indirect Labor + Indirect Expenses= Overheads

Overheads = Factory OH + Administrative OH +Sales and Distribution OH

Prime Cost + Factory OH = Cost of Manufacturing

Cost of Manufacturing + WIP = Factory Cost

Factory Cost + Administrative OH= Cost of Production

Cost of Production + Finished Goods = Cost of Goods Sold

Cost of Goods Sold + Sales and Distribution OH = Cost of Sales OR Total

Cost

Total Cost + Profit = Sales

The following particulars relating to the year 2008 have been taken from the
books of chemical works, manufacturing and selling chemical mixtures.

Particulars Kg Rs.
Stock on 1st Jan 2008 :
RM 2,000 2,000
Finished Mixture 500 1,750
Factory Stores 7,250
Purchases :
RM 1,60,000 1,80,000
Factory stores 24,250
Sales :
Finished Mixture 1,53,050 9,18,000
Factory Scrap 7,800 8,170
Factory Wages 1,78,650
Power 30,400
Depreciation on machinery 18,000
Salaries :
Factory 72,220
Office 37,220
Selling 41,500
Expenses:
Direct 18,500
Office 18,200
Selling 18,000

Stock on 31st Dec 2008:

RM 1,200
Finished Mixtures 450
Factory Stores 5,550

The stock of the finished mixture at the end of 2008 is to be valued at the factory
cost of the mixture for that year. The purchase price of raw materials remained
unchanged throughout 2008.

Prepare the statement giving the maximum possible information about the cost
and its break up for the year 2008.
Classify the following costs in two phases, in phase 1 as direct and
indirect and in phase two as given below:

a) Direct Material
b) Direct Labour
c) Direct Expenses
d) Factory overheads (Works overheads)
e) Administration overheads
f) Selling & Distribution overheads

Telephone rental
Wages of security guards for factory.
Free items sent to customers
Wages of operator in cutting department
Wages of storekeeper in material stores
Chief Accountants Salary
Cost of painting advertising slogans in delivery vans.
Auditors fee.
Cost of advertising on television
Floopy disks for general office computer
Maintenance contract for office photo-copying machine
Interest on bank overdraft.
Market research undertaken prior to new product launch
Carriage on purchase of raw materials
Road license for delivery vehicles.
 Cost Sheet with an example

Cost sheet is a document that provides for the assembly of an estimated

detailed cost in respect of cost centers. It analyzes and classifies in a tabular
form the expenses on different items for a particular period. Additional
columns may also be provided to show the cost of a particular unit
pertaining to each item of expenditure and the total per unit cost.
Cost sheet may be prepared on the basis of actual data (historical cost
sheet) or on the basis of estimated data (estimated cost sheet), depending on
the technique employed and the purpose to be achieved.
Example 1
Following information has been obtained from the records of left center corporation for
the period from June 1 to June 30, 1998. Prepare a statement of cost.

Cost of raw materials on June 1,1998 30,000

Purchase of raw materials during the month 4,50,000
Wages paid 2,30,000
Factory overheads 92,000
Cost of work in progress on June 1, 1998 12,000
Cost of raw materials on June 30, 1998 15,000
Cost of stock of finished goods on June 1, 1998 60,000
Cost of stock of finished goods on June 30, 1998 55,000
Selling and distribution overheads 20,000
Sales 9,00,000
Administration overheads 30,000
Solution
Statement of cost of production of goods manufactured for the period ending on June 30,
1998.
Opening stock of raw materials 30,000
Addpurchase 4,50,000
------------
4,80,000

Less-- closing stock of raw material (15000)

Value of raw materials consumed 4,65,000
Wages 2,30,000
Prime cost 6,95,000
Factory overheads 92,000
Cost of manufacturing 7,87,000
Add-- opening stock of work in progress 12,000
Less-- closing stock of work in progress ------
Factory cost 7,99,000
Add-- Administration overhead 30000
Cost of production 8,29,000
Add--opening stock of finished goods 60,000
Less-- closing stock of finished goods 55,000
Cost of goods sold 8,34,000
Add-- selling and distribution overheads 20,000
Cost of sales (Total cost) 8,54,000
Profit 46,000
Sales 9,00,000
 From the following information, prepare a cost sheet showing the total cost per ton for
the period ended on December 31, 1998. The total output for the period has been 10000
tons.

Raw materials 33,000 Rent and taxes (office) 500

Productive wages 35,000 Water supply 1,200
Direct expenses 3,000 Factory insurance 1,100
Indirect wages 10,500 Office insurance 500
Factory rent and taxes 2,200 Legal expenses 400
Factory lighting 1,500 Rent of warehouse 300
Factory heating 4,400 Depreciation--
Power machine maintenance 3,000 Plant and machinery 2,000
Directors fees (works) 1,000 Office building 1,000
Directors fees (office) 2,000 Delivery vans 200
Factory cleaning 500 Bad debt 100
Sundry office expenses 200 Advertising 300
other factory expenses 800 Sales department salaries 1,500
Factory stationery 750 Up keeping of delivery vans 700
Office stationery 900 Bank charges 50
Loose tools 600 Commission on sales 1,500

Hint:
Step 1: First divide the given items into direct and indirect items.
Step 2: Categorize the indirect items into three categorize of overheads
(Factory, Administrative, sales & distribution)
Step 3: Use the cost sheet equations to write a Cost Sheet for total cost.
Solution:

Raw materials 33,000

Production wages 35,000
Direct expenses 3,000
Prime cost 71,000
Add--works overheads:
Indirect wages 10,500
Factory rent and taxes 2,200
Factory lighting 1,500
Factory heating 4,400

Power machine maintenance 3,000

Directors fees (works) 1,000
Factory cleaning 500
other factory expenses 800
Factory stationery 750
Loses tools 600
Water supply 1,200
Factory insurance 1,100 37,050
Depreciation of plant and machinery 2,000
Works cost (Factory Cost) 1,08,050
Add-- office overhead
Directors fees (office) 2,000
Sundry office expenses 200
Office stationery 900
Rent and taxes (office) 500
Office insurance 500
Legal expenses 400
Depreciation of office building 1,000 5,550
Bank charges 50
Cost of Production(CoGS) 1,13,600
Add-- selling and distribution overheads
Rent of warehouse 300
Depreciation on delivery vans 200
Bad debts 100
Advertising 300
Sales department salaries 1,500
Commission on sales 1,500 4,600
Upkeep of delivery vans 700
Total cost 1,18,200
Cost per ton 1,18,200/10,000 = 11.82