PRODUCT COST SHEET 2019-20

1. INTRODUCTION

1.1 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 producing 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 expended or other party transferred,
capital stock issued, services performed or a liability incurred in consideration of goods
and serviced received or to be received. By cost, we mean the actual cost i.e. historical
cost. ICWA (UK) defines cost as the amount of expenditure (actual or notional)
incurred on, or attributable to a specified thing

1.2 CLASSIFICATION OF COST

Cost classification is the process of grouping costs according to their common
features. Costs are to be classified in such a manner that they are identified with cost
center or cost unit.

1.3 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 constant irrespective of the output upto
capacity limit. It is called as a period cost as it is concerned with period. It depends upon the
passage of time. It is also 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
conditions for production rather than costs of production. They are created by contractual
obligations and managerial decisions. Rent of premises, taxes and insurance, staff salaries
constitute fixed cost.

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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 direct proportion to output. If the output is decreased,
variable cost also will decrease. It is concerned with output or product. Therefore, it is called as
a “product” 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 cost. It remains constant up to a
certain level and registers change afterwards. These 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 example, repairs and maintenance of machinery, telephone charges, supervision
professional tax, etc.
1.4 ON THE BASIS OF ELEMENTS OF COST
Elements means nature of items. A cost is composed 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 raw material used for manufacturing a product. It becomes a part of the

product. No finished product can be manufactured without basic raw materials. It is easily identifiable
and chargeable to the product. For example, leather in leatherwares, 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:

[Link] materials specially purchased for production or the process.

[Link] components purchased for production or the process.

[Link] transferred from one cost center to another or one process to another.

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[Link] packing materials, wrappings, cardboard boxes etc, necessary for preservation or protection of
product.

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.

1.5 DIRECT LABOUR OR DIRECT WAGES

It is the amount paid to those workers who are engaged 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 product. These workers directly handle raw materials,
work in progress and finished goods on the production line. Wages paid to the workers operating
lathes, drilling, cutting machines etc are direct wages. Direct wages are also as

productive labour, process labour or prime cost labour.

Direct wages include the payment made to the following group of workers:

[Link] engaged on the capital production of the product.

[Link] engaged in aiding the operations viz. Supervisor, Foreman, Shop clerks and Worker on internal
transport.

[Link], Analysts needed for such production.

1.6 DIRECT EXPENSES OR CHARGEABLE EXPENSES

It is the amount of expenses which is directly chargeable to the product manufactured or

which may be allocated to product directly. It can be easily identified with the product. For
example, hire charges 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
experimental work carried out especially for a job etc. Cost of special drawings, cost of
special layout designs, patents, patterns, cost of models, surveyors fees, Excise duty,
royalty on production, cost of rectifying defective work. Utility of such expenses is exhausted on
completion of job.

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INDIRECT COST
It is that portion of the total 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
suitable 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 to the
product directly. It cannot be treated as a part of the product. It is also known as expenses
materials. It is the material which cannot be allocated to the product but which can be
apportioned to the cost units. Examples are as follows:

[Link], cotton waste, oil, grease, stationery etc

[Link] tools for general use

[Link] 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 supervision.

INDIRECT EXPENSES

It is the amount of expenses which is not chargeable to the product directly. It is the cost
of giving service to the production department. It includes factory expenses, administrative
expenses, selling and distribution expenses etc.

1.7 OVERHEADS COST

Aggregate of indirect cost is referred to as overheads. It arises as a result of overall

operation of a business. According to Weldon overheads mean, ”the cost of indirect material,
indirect labour and such other expenses, including services as cannot conveniently be charged
direct to specific cost units”. It includes all manufacturing and non-manufacturing supplies and
services. These costs cannot be associated with a particular product. The principal feature of
overheads is the lack of direct traceability to individual product. It remains relatively constant
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from period to period. The amount of overheads is not directly chargeable i.e. it has to be
properly allocated, apportioned and absorbed on some equitable basis.

1.8 CLASSIFICATION OF OVERHEADS

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
expenses viz, factory salary, work managers salary, factory repairs, rent of factory premises,
factory lighting, lubricants, factory power, drawing office salary, haulage (cost of internal
transport) depreciation of plant and machinery unproductive wages, estimation expenses,
royalties, loose tools w/ off, material handling charges, time office salaries, counting house
salaries etc.

1.9 ADMINISTRATIVE OR OFFICE 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 following expenses: Staff salaries, printing and
stationery, postage and telegram, telephone charges, rent of office premises, office conveyance,
printing and stationery and repairs and depreciation of office premises and furniture etc.

SELLING & DISTRIBUTION OVERHEADS

It is the aggregate of all the expenses incurred in connection with sales and distribution
of finished product and services. It is the cost of sales and distribution services. Selling expenses
are such expenses which are incurred acquiring and retaining customers. It includes the
following expenses:

a- Advertisement
b- Show room expenses
c- Traveling expenses
d- Commission to agents
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e- Salaries of Sales office

f- Cost of catalogues
g- Discount allowed
h- Bad debts written off
i- Commission on sales
j- Rent of Sales 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 demonstration.

Distribution expenses include all those expense which are incurred in connection with
making the goods available to customers these expense includes 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 delivery van (g) Expense on delivery van (h) Salaries of
Godown keeper, drivers and packing staff.

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2. COST SHEET

For determination of total cost of production a statement showing the various elements
of is prepared. This statement is called as a statement of cost or cost sheet. Cost sheet is a
statement which provides assembly of the detailed cost of a cost center or a cost unit. It is a
statement showing the details 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 so. 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.

2.1 PURPOSE OF COST SHEET

[Link] gives the breakup of total cost under different elements.

[Link] shows total cost as well as cost per unit.

[Link] helps in comparison with previous years.

[Link] facilities preparation of tenders or quotations.

[Link] enables the management to fix up selling price.

2.2 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 Materials + Direct Labour + Direct Expenses

WORKS COST

It is also known as a factory cost or cost of manufacture. It is the cost of manufacturing

an article. It includes prime cost and factory expenses.

Works Cost = Prime Cost + Factory Overheads

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COST 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 expenses.

Total Cost= Cost of Production + Selling & Distribution Expenses

SELLING PRICE

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)Profit on Sale of fixed assets

e)All the assets

f)Donations

g)Capital Expenditure

h)Discount on shares & Debentures

i)Commission to Partners, Managers etc

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j)Brokerage

k)Preliminary Expenses Written off.

2.3 UTILITY OF COST SHEET

DETERMINE THE TOTAL COST

A total cost sheet (statement) helps in determining aggregate cost of manufacturing a

product or providing a service.

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 & services.

COST REDUCTION OR COST CONTROL

Cost sheets helps in identifying the total cost stage wise & any unwanted cost can be curtailed.

2.4 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.

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2.5 DETERMINATION OF TOTAL COST

Cost of product is determined as per cost attach concept. Total cost of a product consists
of various elements of cost which have the quality of coherence. All the elements of cost can be
grouped and regrouped. Grouping and regrouping of various elements of cost leads to significant
divisions of cost. The logical process of determination of cost by grouping and regrouping
various elements is illustrated as follows:

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3. PREPARE COST SHEET

Laxmi Soap Factory was established in the year 1959. But for the Ranglani family, the
roots of soap manufacturing are traceable to the year 1921. Sheth Thakurdas Ranglani was
based in Karachi when he initially started a soap-manufacturing unit . After partition,
Thakurdas migrated to India and started a manufacturing unit in the year 1948.
The company manufactures Laundry Detergent, Detergent Cake, Detergent Powder /
Dish Scouring bar and Toilet Soap / Laundry Soap / Multipurpose Soap and Essance
Sticks(Agarbatti) also have their own Sulfonation plant. The company intends to go in for the
manufacture of toilet soaps. As [Link] puts it, "Ambitious plans are on the anvil inspite of
stiff competition from all types of manufacturers, big and small."

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COST SHEET

UNITS OF PRODUCTION = 170000

PARTICULAR PER UNIT PRICE TOTAL

PRICE

DIRECT MATERIAL 5.8 1000000

Acids 1.76 300000

Speciality chemicals 1.47 250000

Ordinary chemicals 1.76 300000

Perfumes .21 35000

TOTAL 1.29 220000

Direct labour

Direct expense 3.11 530000

Prime cost 15.4 4134500

Factory overheads :

Fixed:

Depreciation 1.47 250000

Rent .58 100000

Power 1.02 175000

Insurance 0.88 150000

Supervisors salary 0.35 60000

Variable:

Electricity 0.41 70000

Running exp. Of machine .58 100000

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Work cost/ factory cost 20.69 5039500

Office overheads:

Employee cost 5.8 1000000

Other exp.

Computer 0.71 120000

Telephone 0.06 10000

Taxes 0.24 40000

Carriage out ward 0.12 20000

Cost of production 27.62 6229500

opening stock of finished goods 2 200000

-Closing stock of finished goods 0 0

Cost of goods sold 29.62 6429500

Selling & distribution overheads:

Advertisement 2.35 400000

Delivery vehicles 2.06 350000

Petrol 1.03 175000

Packaging rates 0.3 50500

Cost of sales / total cost 35.36 7405000

Profit 18.51 3146700

Sales 53.87 10551700

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3.1 COST SHEET ANALYSIS

Information:-

 Selling & distribution overheads:

 Advertisement 2.35 400000
 Delivery vehicles 2.06 350000
 Petrol 1.03 175000
 Packaging rates 0.3 50500

 Depreciation 1.47 250000

 Rent .58 100000
 Power 1.02 175000

With the help of factory overhead , administration overhead & selling and

distribution overhead we can characterise the cost sheet and the total sales of

laxmi soap factory is 10551700.

With the help of this information we can easily identify :-

 Pvr

 Breakeven point in rupees

 Breakeven point in units

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3.2 CONCLUSION:-

 PVR = Cost/ sales

= 7405000/ 10551700

= 0.70

Note:- to better understanding we can say that PVR is 70%.

 Breakeven point (rupees) = fixed cost/ PVR

= 735000/ 0.70

= 1050000

Fixed cost include :-

Depreciation 1.47 250000

Rent .58 100000

Power 1.02 175000

Insurance 0.88 150000

Supervisors salary 0.35 60000

 Breakeven point (Unites) = fixed cost/ cost
= 735000/7405000
= 0.099

 Margin of safety Ratio = profit/ PVR

= 3146700/0.70
= 4495285.7

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