Know the Meaning and Format of Cost Sheet

A cost sheet, as the name itself suggests, is a document or a sheet containing the cost of a product or a group of products. The industry uses it to determine the cost of the products manufactured and fixation of the selling price after adding the Profit Margin. A cost sheet is a report that lists all of the costs connected with a product or manufacturing process. A cost sheet is used to calculate the profit margin on a product or activity and set prices for similar products in the future. It can also be used to support a variety of cost-cutting methods.

Although cost sheets are generally and more frequently used in manufacturing companies, they can also be useful for service providers. Any business owner (manufacturer or service provider) can calculate the overall production cost or service cost and set the price per item for commodities or services using this information.

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What is the Purpose of Preparing a Cost Sheet?

A cost sheet is an analytical statement of presentation of various types of costs or expenses incurred for manufacturing a product or a group of products or costs incurred/to be incurred for providing a service or bundle of services. 

Generally, the cost sheet is used and always preferred to determine per unit cost of an item or product so that its price can be fixed by adding desired profit margin. But many times, cost sheets are also used to determine the cost of a particular lot of items. Like in the garment industry where a pre-decided quantity of similar size and design is prepared by the same type of manufacturing process using the same type of fabric and accessories etc. The total cost of the task, order, or operation is revealed on the cost sheet. 

What is the Importance of Cost Sheet?

 The cost sheet is an important statement for the management as well as for the customers as described below- 

1. For Management

The primary goal of preparing a cost sheet is to determine an accurate cost of the product or group of products. It has the total cost as well as the cost per unit of a product. It helps and allows the management to compare a product's current cost per unit to an earlier cost per unit for the same product. If costs have escalated, comparing them allows management to take necessary corrective action in time. Thus, the cost sheet is an important document for the management in controlling production costs in a manufacturing unit. 

The cost sheet is used to make some of the most significant decisions made by management. Managers use the cost sheet whenever a company wants to manufacture or purchase a component or quote pricing for its goods. Therefore a cost sheet always helps the management in the decision-making process.

2. For Customers

Another important objective of preparing a cost sheet is from the customer’s point of view. Often, a manufacturer has to share the cost sheet of their product or group of products with their customer to negotiate the selling price for any new product. Or it may be for increasing the selling price of an existing product due to various cost escalation factors like increase in the cost of raw material and other consumable items, increase in the wages to workers, increase on account of freight, increase in taxes or duties, etc. A cost sheet is also needed while participating in the tenders to supply various items/components to the Govt. Departments or to other big companies in the private sector.

What are the Types of Costs?

Before understanding the various components of a cost sheet, we must understand the types of costs in any business organisation. There are two types of costs in every business organisation which are given as under-

1. Fixed Costs: These costs are those that remain fixed, like building rent (if business premises are on rent).  If a business entity owns a building, then the fixed costs include depreciation of building, depreciation of machinery, insurance expenses, pre-decided advertisement expenses, remuneration paid to directors and other senior managers, etc.
2.  Variable Costs: These types of costs do not remain fixed but are variable, i.e., they keep on changing with the production level. If the production level goes up, variable cost increases, and if production level comes down, variable cost decreases. The examples of variable costs are the cost of raw material, cost of wages, cost of power & fuel, cost of freight & cartage, etc.

 Both types of costs are taken into account while preparing a cost sheet. 

What are the Components of a Cost Sheet?

 After understanding the different types of costs in the business organisation, now it's time to prepare a cost sheet that consists of the following important elements- 

• Prime Cost: The complete direct cost of the manufacturing process is referred to as prime cost. Direct material costs, direct labour costs, and direct expenses are all included. 

Examples of such expenses: Raw material cost, consumables cost, wages to workers, incentives to workers, power & fuel, salary to production supervisors, foreman, junior engineers, freight & cartage, and unloading charges of incoming raw material & consumables, etc. 

In a summarised way, it can be written as:

Prime Cost = Direct Material Direct + Wages Direct Expenses

• Factory Cost or Works Cost: The factory cost or Works Cost consists of Prime Cost plus factory overheads, i.e. cost of all types of indirect material, indirect wages, and indirect expenses. 

Examples of such expenses: repair & maintenance to machinery & factory building, machine tools, consumption of oils, lubricants, gas, etc., salary to Production Manager, stores and warehouse for raw material (RM) Store In-charge, and other Production & Store Staff, Factory Lighting, rent, labour welfare expenses, etc. It also includes the cost of semi-finished goods or incomplete units, popularly known as Work in Process (WIP). 

In a summarised way, Factory Cost can be written as:

Works cost formula = Prime Cost Factory Overheads (Indirect Material + Indirect Wages Indirect Expenses) + Opening WIP – Closing WIP

• Cost of Production: The cost of production consists of factory cost plus all types of other direct and indirect costs, i.e. office or administration cost (Administration Overheads). 

Examples of such expenses: Salary to office staff working in accounts, costing, purchase, human resources departments, etc., stationery, telephone expenses, office lighting, remuneration to directors, staff welfare expenses, audit expenses, legal & professional charges, etc. 

In a summarised way, Cost of Production can be written as:

Cost of Production = Factory Cost + Administration Overheads 

• Cost of Goods sold: If the cost of Finished Goods is included in the cost of production, we can arrive at the cost of goods sold in the following manner:

Cost of Goods Sold = Cost of Production + Opening Stock of Finished Goods – Closing Stock of Finished Goods

• Cost of Sales: When the selling & distribution overheads/expenses are added to the Cost of goods sold, we arrive at the cost of sales. 

Examples of such expenses: Salary to the sales team, commission on sales, advertisement expenses, travelling & hotel stay expenses of sales staff, warehouse or showroom rent or depreciation, etc. Thus, Cost of Sales is summarised as:

Cost of Sales = Cost of Goods Sold + Selling & Distribution Overheads

• Profit: The last item of every cost sheet is Profit which can be termed as the difference of selling price and cost of sales in the case of existing items. But for the new item, the manufacturer has to keep a minimum desired level of profit margin and decide about the selling price accordingly. Thus, a cost sheet also helps in setting up Maximum Retail Price (MRP). 

The formula for determination of Profit can be written as:

Profit = Selling price – Cost of Goods sold

Alternatively, the Selling Price of a Product can be determined by the following formula: Selling Price = Cost of Sales + Profit

Also Read: Balance Sheet - Definition & Examples (Assets = Liabilities + Equity)

Cost Sheet Format

The format of cost sheet is as follows:                  

Name of Company………………………………..

Cost Sheet Example

 Let us take an example to prepare a cost sheet for XYZ Ltd for the year ending on 31 March, …………….on the basis of the following information available with us: 

• Purchases of stores and warehouse for raw material (RM) & Direct Consumables= Rs. 25,000/-
• Opening stock of RM & Direct Consumables= Rs. 4,000/-
• Closing stock of RM & Direct Consumables= Rs. 2,000/-
• Direct Wages paid to workers= Rs. 6,000/-
• Other Direct expenses= Rs. 2,000/-
• Factory Expenses/Overheads= Rs. 2,500/-
• Office and administration overhead is assumed to be 30% of Factory costs in the absence of exact data.
• Opening stock for finished goods= Rs. 3,000/-
• Closing stock for finished goods= Rs. 4,000/-
• Selling and distribution Expenses/Overhead= Rs. 5,000/-
• Profit Margin on Total on cost=  30%

 Now, the cost sheet can be prepared as follows: 

Also Read: What is Double Entry System of Accounting

Conclusion

This article on the cost sheet is meant for everybody doing business or intending to do business. You can now understand the various important aspects of determining the cost of a product/group of products. You can also know the profit margin on one product or group of products for decision making. We hope the article would have given you the required information about cost Sheet meaning, cost sheet format, components of cost sheet, etc.

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