MEANING OF COST ‘COST’ represents a sacrifice of values, a foregoing or a release of

something of value. It is the price of economic resources used as a result of p

roducing or doing the thing costed. It is the amount of expenditure incurred on
a given thing. Cost has been defined as the amount measured in money or cash exp
ended or other party transferred, capital stock issued, services performed or a
liability incurred in consideration of goods and serviced received or to be rece
ived. By cost, we mean the actual cost i.e. historical cost. ICWA (UK) defines c
ost as the amount of expenditure (actual or notional) incurred on, or attributab
le to a specified thing or activity. CLASSIFICATION OF COST Cost classification
is the process of grouping costs according to their common features. Costs are t
o be classified in such a manner that they are identified with cost center or co
st unit. ON THE BASIS OF BEHAVIOUR OF COST Behavior means change in cost due to
change in output. On the basis of behavior cost is classified into the following
categories: FIXED COST It is that portion of the total cost which remains const
ant irrespective of the output upto capacity limit. It is called as a period cos
t as it is concerned with period. It depends upon the passage of time. It is als
o referred to as non-variable cost or stand by cost, capacity cost or “period” cost.
It tends to be unaffected by variations in output. These costs provide conditio
ns for production rather than costs of production. They are created by contractu
al obligations and managerial decisions. Rent of premises, taxes and insurance,
staff salaries constitute fixed cost.
VARIABLE COST This cost varies according to the output. In other words, it is a
cost which changes according to the changes in output. It tends to vary in direc
t proportion to output. If the output is decreased, variable cost also will decr
ease. It is concerned with output or product. Therefore, it is called as a “produc
t” cost. If the output is doubled, variable cost will also be doubled. For example
, direct material, direct labour, direct expenses and variable overheads. It is
shown in the diagram below.
SEMI-VARIABLE COST This is also referred to as semi-fixed or partly variable cos
t. It remains constant up to a certain level and registers change afterwards. Th
ese costs vary in some degree with volume but not in direct or same proportion.
Such costs are fixed only in relation to specified constant conditions. For exam
ple, repairs and maintenance
of machinery, telephone charges, supervision professional tax, etc.
ON THE BASIS OF ELEMENTS OF COST Elements means nature of items. A cost is compo
sed of three elements, material, labour and expenses. Each of these elements can
be direct and indirect. DIRECT COST It is the cost which is directly chargeable
to the product manufactured. It is easily identifiable. Direct cost consists of
three elements which are as follows: • DIRECT MATERIAL It is the cost of basic ra
w material used for manufacturing a product. It becomes a part of the product. N
o finished product can be manufactured without basic raw materials. It is easily
identifiable and chargeable to the product. For example, leather in leatherware
s, pulp in paper, steel in steel furniture, sugarcane for sugarcane etc. what is
raw material for one manufacturer might be finished product for another. Direct
material includes the following:
1. All materials specially purchased for production or the process. 2. All compo
nents purchased for production or the process. 3. Material transferred from one
cost center to another or one process to another. 4. Primary packing materials,
wrappings, cardboard boxes etc, necessary for preservation or protection of prod
uct. Some of the items like nails or thread in the store are a part of finished
product. They are not treated as direct materials in view of negligible cost. • DI
RECT LABOUR OR DIRECT WAGES It is the amount paid to those workers who are engag
ed in the manufacturing line for conversion of raw materials into finished goods
. The amount of wages can be easily identified and directly charged to the produ
ct. These workers directly handle raw materials, work in progress and finished g
oods on the production line. Wages paid to the workers operating lathes, drillin
g, cutting machines etc are direct wages. Direct wages are also as productive la
bour, process labour or prime cost labour. Direct wages include the payment made
to the following group of workers: 1. Labour engaged on the capital production
of the product. 2. Labour engaged in aiding the operations viz. Supervisor, Fore
man, Shop clerks and Worker on internal transport. 3. Inspectors, Analysts neede
d for such production.
• DIRECT EXPENSES OR CHARGEABLE EXPENSES It is the amount of expenses which is dir
ectly chargeable to the product manufactured or which may be allocated to produc
t directly. It can be easily identified with the product. For example, hire char
ges of a special machine used for manufacturing a product, cost of designing the
product, cost of patterns, architects fees/surveyors fees, or job cost of exper
imental work carried out especially for a job etc. Cost of special drawings, cos
t of special
layout designs, patents, patterns, cost of models, surveyors fees, Excise duty,
royalty on production, cost of rectifying defective work. Utility of such expens
es is exhausted on completion of job. • INDIRECT COST It is that portion of the to
tal cost which cannot be identified and charged directly to the product. It has
to be allocated and apportioned and absorbed over the units manufactured on a su
itable basis. It consists of the following three elements: • INDIRECT MATERIAL It
is the cost of the material other than direct material which cannot be charged t
o the product directly. It cannot be treated as a part of the product. It is als
o known as expenses materials. It is the material which cannot be allocated to t
he product but which can be apportioned to the cost units. Examples are as follo
ws: 1. Lubricants, cotton waste, oil, grease, stationery etc 2. Small tools for
general use 3. Some minor items such as thread in dress making, cost of nails in
shoemaking etc • INDIRECT LABOUR It is the amount of wages paid to those workers
who are not engaged on the manufacturing line, for example, wages of workers in
administration department, watch n ward department, sales department, general su
pervision. • INDIRECT EXPENSES It is the amount of expenses which is not chargeabl
e to the product directly. It is the cost of giving service to the production de
partment. It includes factory expenses, administrative expenses, selling and dis
tribution expenses etc.
• OVERHEADS OR ON COST OR BURDEN OR SUPPLEMNTARY COST Aggregate of indirect cost i
s referred to as overheads. It arises as a result of overall operation of a busi
ness. According to Weldon overheads mean, ”the cost of indirect material, indirect
labour and such other expenses, including services as cannot conveniently be ch
arged direct to specific cost units”. It includes all manufacturing and non-manufa
cturing supplies and services. These costs cannot be associated with a particula
r product. The principal feature of overheads is the lack of direct traceability
to individual product. It remains relatively constant from period to period. Th
e amount of overheads is not directly chargeable i.e. it has to be properly allo
cated, apportioned and absorbed on some equitable basis. CLASSIFICATION OF OVERH
EADS • ON THE BASIS OF FUNCTIONS • FACTORY OVERHEADS It is the aggregate of all the
factory expenses incurred in connection with manufacture of a product. These are
incurred in connection with running of factory. It includes the items of expens
es viz, factory salary, work managers salary, factory repairs, rent of factory p
remises, factory lighting, lubricants, factory power, drawing office salary, hau
lage (cost of internal transport) depreciation of plant and machinery unproducti
ve wages, estimation expenses, royalties, loose tools w/ off, material handling
charges, time office salaries, counting house salaries etc. • ADMINISTRATIVE OR OF
FICE OVERHEADS It is the aggregate of all the expenses as regards administration
. It is the cost of office service or decision-making. It consists of the follow
ing expenses: Staff salaries, printing and stationery, postage and telegram, tel
ephone charges, rent of office
premises, office conveyance, printing and stationery and repairs and depreciatio
n of office premises and furniture etc.
• SELLING & DISTRIBUTION OVERHEADS It is the aggregate of all the expenses incurre
d in connection with sales and distribution of finished product and services. It
is the cost of sales and distribution services. Selling expenses are such expen
ses which are incurred acquiring and retaining customers. It includes the follow
ing expenses: (a) Advertisement (b) Show room expenses (c) Traveling expenses (d
) Commission to agents (e) Salaries of Sales office (f) Cost of catalogues (g) D
iscount allowed (h) Bad debts written off (i) Commission on sales (j) Rent of Sa
les Room (k) Sample and Free gifts (L) After sales service expenses (m) Expenses
on demonstration and technical advice to prospective customers (n) Free repairs
and servicing expenses (o) Expenses on market research (p) Fancy packing and de
monstration. Distribution expenses include all those expense which are incurred
in connection with making the goods available to customers these expense include
s the following (a) Packing charges (b) Loading charges (c) Carriages on sales (
d) Rent on warehouse (e) Insurance and lighting of warehouse (f) Insurance of de
livery van (g) Expense on delivery van (h) Salaries of Godownkeeper, drivers and
packing staff.
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 o
f cost or cost sheet. Cost sheet is a statement which provides assembly of the d
etailed cost of a cost center or a cost unit. It is a statement showing the deta
ils of a) total cost of job b) Cost of an operation or order. It brings out the
composition of total cost in a logical order under proper classifications & sub-
divisions. The period is covered by the cost sheet may be by a week a month or s
o. Separate columns are provided to show total cost, cost per-unit etc. In case
of different products there are different cost sheets for different products. A
cost sheet is prepared under output or unit costing method.
PURPOSE OF COST SHEET
1. 2. 3. 4. 5. 6.
It gives the break up of total cost under different elements. It shows total cos
t as well as cost per unit. It helps in comparison with previous years. It facil
ities preparation of tenders or quotations. It enables the management to fix up
selling price. It controls cost.
DIVISIONS OF COST • PRIME COST It comprises of all direct materials, direct labour
and direct expenses. It is also known as flat cost Prime cost = Direct Material
s + Direct Labour + Direct Expenses • WORKS COST It is also known as a factory cos
t or cost of manufacture. It is the cost of manufacturing an article. It include
s prime cost and factory expenses. Works Cost = Prime Cost + Factory Overheads • C
OST OF PRODUCTION It represents factory cost plus administrative expenses. Cost
of Production = Factory Cost + Administrative Expenses
• TOTAL COST It represents cost of production plus selling and distribution expens
es. Total Cost= Cost of Production + Selling & Distribution Expenses • SELLING PRI
CE It is the price which includes total cost plus margin of profit or minus loss
, if any. Selling Price = Total Cost + Profit (-Loss)
NON COST ITEMS Non-cost items are those items which do not form part of cost of
a product. Such items should not be considered while ascertaining the cost of a
product. These are items included in the Profit & Loss A/c. These will not come
in the cost sheet a) Income tax b) Interest on capital c) Interest on loan d) Pr
ofit on Sale of fixed assets e) All the assets f) Donations g) Capital Expenditu
re h) Discount on shares & Debentures i) Commission to Partners, Managers etc j)
Brokerage k) Preliminary Expenses Written off. l) Wealth tax etc
m)Bonus to directors and employees if it is based on profit, expenses of raising
capital, penalties & fines.
UTILITY OF COST SHEET • DETERMINE THE TOTAL COST A total cost sheet (statement) he
lps in determining aggregate cost of manufacturing a product or providing a serv
ice. • DETERMINING PRODUCT PRICE A cost sheet helps in identifying the total cost
for a product or service which in turn helps in properly pricing of products & s
ervices. • COST REDUCTION OR COST CONTROL Cost sheets helps in identifying the tot
al cost stage wise & any unwanted cost can be curtailed. • PREPARE BUDGETS A cost
statement helps in preparing budget for each department
• PROFIT PLANNING It helps to minimize cost & increase profits. 1. STAGE WISE COST
IDENTIFICATION Costs such as prime cost, factory cost, cost of production, cost
of goods sold, total cost of sale etc.
2. DETERMINE THE COST PER UNIT This helps in determining cost per unit on which
u can predict further cost.
DETERMINATION OF TOTAL COST Cost of product is determined as per cost attach con
cept. Total cost of a product consists of various elements of cost which have th
e quality of coherence. All the elements of cost can be grouped and regrouped. G
rouping and regrouping of various elements of cost leads to significant division
s of cost. The logical process of determination of cost by grouping and regroupi
ng various elements is illustrated as follows:
COST SHEET PROFORMA OF COST SHEET PARTICULARS Opening Stock Raw Materials Add: P
urchase Add: Carriage Inward Add: Octroi and Customs Duty Less: Closing Stock of
Raw Materials Cost of Direct Material Consumed Direct Wages Direct or Chargeabl
e Wages PRIME COST XXX Add: Works of Factory Overheads: Indirect Materials Indir
ect Wages Leave Wages Bonus to Workers Overtime Wages Fuel and Power Rent and Ta
xes Insurance Factory Lightings Supervision Works Stationary Canteen and Welfare
Expenses Repairs Works Salaries Depreciation of Plant and Machinery Works Expen
ses Gas and Water Technical Director’s Fees Laboratory Expenses Works Transport Ex
penses Works Telephone Expenses XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX TOTAL CO
ST Rs.
XXX XXX XXX XXX
Add: Opening Stock of Work-in-Progress Less: Closing Stock of Work-in-Progress L
ess: Sale of Waste WORKS COST
XXX XXX XXX XXX
Add: Office and Administration Overheads: Office Salaries Directors Fees Office
Rents And Rates Office Stationary and Printing Sundry Office Expenses Depreciati
on on Office Furniture Subscription to Trade Journals Office Lightings Establish
ment Charges Directors Traveling Expenses Consultants Fees Contribution to Provi
dent Fund Postage Legal Charges Audit Fees Bank Charges Depreciation And Repairs
of Office Equipments Bonus to Staff COST OF PRODUCTION Add :Opening Stock of Fi
nished Goods Less: Closing Stock of Finished Goods COST OF GOODS SOLD
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
Add: Selling and Distribution Overheads Advertising Show Room Expenses Salesman’s
Salaries and Expenses
XXX
Packing Expenses Carriage Outward Commission of Sales Agents Cost of Catalogues
Expenses of Delivery Vans Collection Charges Traveling Expenses Cost Tenders War
ehouse Expenses Cost of Mailing Literature Sales Manager’s Salaries Insurance of S
howroom Sales Director’s Fees Sales Office Expenses Rent of Sales Office Depreciat
ion of Delivery Vans Expenses of Sales Branch Establishments Branch Office Expen
ses TOTAL COST/TOTAL OF SALES Profit or Loss SALES
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
XXX XXX
ESTIMATION OF COST Very often, the management desires to know, ‘what will be the c
ost?’ even before the production starts. The purpose to know the cost before it is
incurred, might be different. It may be to keep the cost within control or it m
ay be used for profit planning. May times it is required to submit tenders, to g
ive quotations, to prepare price lists etc. For this purpose the estimations of “p
robable cost” of production is essential. This requires the past cost data to be a
nalysed, present circumstances are taken into consideration and future is projec
ted. The technique is known as estimation of cost. This involves the study of ea
ch and every element of cost and their nature of behaviour . Keeping in view the
nature of behaviour of elements of cost, it can be classified into following th
ree categories: • FIXED COST Fixed cost is that cost which remains unaffected even
though there is change in the level of output. It remains constant at all level
s of output for a given period of time. Examples of such costs are rent, rated a
nd taxes of factory premises, salary of general manager, foreman, watchman, insu
rance, depreciation etc. These expenses incur according to the unit of time and
not according to level of production. Hence sometimes it is called as periodic c
ost. For example such fixed cost is ascertained of a particular concern Rs. 1200
0 pm. The capacity of this concern is to produce 1000 units pm. If they produce
100 units or 500 units or 700 units or 100 units the fixed cost will remain cons
tant at all these levels of output. This fixed cost remains fixed at all levels
of output, but the cost per unit changes if there is a change in the level of ou
tput. • VARIABLE COST It is the cost which tends to vary directly with the volume
of output. If there is increase in output this cost increases and vice versa. Th
e change in the variable cost takes place in the same direction in which the lev
el of output changes. This cost consists of direct materials, direct wages, dire
ct expenses and some part of indirect expenses which varied according to the lev
el of output. Say for example if standard unit of final product requires the raw
materials of Rs.20 per unit the expenses on direct materials will
change if level of output changes. However variable cost per unit will remain un
changed provided the price level does not change. • SEMI-VARIABLE COST This is the
third category of nature of behavior of the expenses. These expenses are neithe
r fixed nor variable. These expenses change in the same direction in which the l
evel of output changes. Thus these expenses are partly fixed partly variable in
nature. Examples of such expenses are depreciation of plant and machinery, maint
enance of factory building etc. These expenses will increase if factory is run f
rom single shift to double or triple shifts. Depreciation and maintenance will i
ncrease but not in the same ratio, the output increases. Thus these expenses are
neither fixed nor variable cent percent. Hence they are called as semi variable
expenses.
CERTIFICATE The following project has been satisfactorily performed by Nikhil Ab
hyankar 01 Mangala Borkar 11 Sunil Chadda 12 Bhagyesh Gandhi 21 Avinash Dhone 17
Snehal Dolas 19 Roshan Kambli 38 Ketki Khandagale 43 Priyank Mehta 53 Abhijeet
Motto 58 studying in Bhavans College, Class F.Y. BMS Div A during the academic y
ear 2008-2009
DECLARATION We hereby declare that this project namely COST SHEET is done solely
by our group, which consists of TEN people whose names are given below Nikhil A
bhyankar 01 Mangala Borkar 11 Sunil Chadda 12 Bhagyesh Gandhi 21 Avinash Dhone 1
7 Snehal Dolas 19 Roshan Kambli 38 Ketki Khandagale 43 Priyank Mehta 53 Abhijeet
Motto 58 under the expert guidance of our respected professor Mrs. Riddhi Sharm
a. We further declare that the content of this project is true and to the best o
f our knowledge.
Solved example of Cost Sheet The accounts of Z ltd for the yr ended 31st Dec 200
4, shows the following: Rs. Work office salaries 6500 Administrative office sala
ries 12600 Cash Discounts Allowed 2900 Carriage Outward 4300 Carriage Inward 715
0 Bad Debts Written Off 6500 Repairs to Plant & Machinery 4450 Rents, Rates, Tax
es, Insurance etc Factory 8500 Office 2000 Sales 461000 Stock of Raw Materials 1
st Jan, 04 48000 st 31 Jan, 04 62000 Materials Purchased 185000 Traveling Expens
es 2100 Travelers Salaries and Commission 7700 Productive Wages 126000 Depreciat
ion on Plant & Machinery 6500 Depreciation on Office Furniture 300 Directors Fee
s 6000 Gas & Water (Factory) 1200 Gas & Water (Office) 400 Managers salary (1/4
office & ¾ Factory) 10000 General Expenses 3400
You are required to prepare a cost statement for the year ended 31st Dec 04
Solution: Z Ltd Cost Statement for the yr ended 31st Dec 2004 Particulars Rs. Ra
w Materials Consumed: Stock of Raw materials as on 1st Jan 04 (+) Materials Purc
hased (+) Carriage Inward (-) Stock of Raw Materials as on 31st Dec 04 Raw Mater
ials Consumed Productive Wages Prime Cost Add: Works/Factory Overheads Work Offi
ce Salaries Repairs to P/M Rents, Rates, Taxes & Insurance etc- Factory Deprecia
tion on P/M Gas & Water (Factory) Manager’s Salary (3/4) Works or Factory Overhead
s Works Cost Add: Office & Administrative Overheads Administrative Office Salari
es Rents, Rates, Taxes, Insurance etc- Office Depreciation on Office furniture D
irector’s Fees Gas & Water (office) Manager’s salary (1/4) General Expenses Office &
Administrative Overheads Cost of Production/ Cost of Goods Sold Add: Selling &
Distribution Overheads Carriage Outward Traveling Expenses Travelers Salary & Co
mmission Selling & distribution Overheads Total Cost of Sales 48,000 1,85,000 7,
150 62,800 1,77,350 1,26,000 3,03,350 6,500 4,450 8,500 6,500 1,200 7,500 34,650
3,38,000 12,600 2,000 300 6,000 400 2,500 3,400 27,200 3,65,200 4,300 2,100 7,7
00 14,100 3,79,300 Rs.
Add: Profit (Balancing Figure) Sales
81,700 4,61,000
PROFORMA OF ESTIMATED COST SHEET Total Cost XXX XXX XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX Per Unit XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total Cost XXX
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Per Unit XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXX
Direct Material Direct Labour Direct Wages Prime Cost Factory Overheads Works Co
st Office & Administration Overheads Cost of Production Selling & distribution O
verheads Cost of Sales Profit Sales
SOLVED EXAMPLE OF ESTIMATED COST SHEET Swadeshi Electronics Ltd. furnishes you t
he following information for the year ended 31st March 06 Production & sales Sal
es Direct wages Direct materials Factory overheads Administrative overheads Sale
s overheads 15000 units Rs. 1275000 Rs. 270000 Rs. 330000 Rs. 225000 Rs.105000 R
s. 90000
On account of intense competition following changes are estimated in the subsequ
ent year: 1. Production and sales activity will be increased by one third 2. Mat
erial rate will be lowered by 25%. However there will be increase in consumption
by 20% 3. Direct wages cost would be reduced by 20% due to automation 4. Out of
the above factory overheads rs. 45000 are fixed in nature. The remaining factor
y expenses are variable in proportion to the number of units produced 5. Total a
dministrative expenses will be lowered by 40% 6. Sales overhead per unit would r
emain the same 7. Sales price per unit would be lowered by 20% Prepare a stateme
nt of cost for both the yrs ending 31st March 06 and 31st March 07 showing maxim
um possible details of cost
Solution: Swadeshi Electronics Ltd Cost Sheet for the yr ended 31st Mar 06 & 31s
t March 07 15000 20000 Total Per Unit Total Per Unit Cost Cost Direct Materials
330000 22 396000 19.8 Direct Wages 270000 18 288000 14.4 Prime Cost Factory Over
heads Works Cost Administrative Overheads Cost of Production Sales Overheads Cos
t of Sales Profit Sales 600000 225000 825000 105000 930000 90000 1020000 255000
1275000 40 15 55 07 62 06 68 17 85 684000 285000 969000 63000 1032000 120000 115
2000 208000 1360000 34.2 14.25 48.45 3.15 51.6 06 57.6 10.4 68