Preparation of Cost Sheet

Unit IV: Managerial Accounting

✅ What is a Cost Sheet?

A cost sheet is a formal statement that presents the detailed cost components of producing a product or service in a structured and logical order. It is primarily used for:

Determining the total cost and cost per unit,
Assisting in pricing decisions,
Controlling costs, and
Facilitating cost comparison over periods or between products.

It is typically prepared periodically (monthly, quarterly, etc.) or for specific jobs or batches.

✅ Objectives of a Cost Sheet

To ascertain the total and per-unit cost of production and sale.
To analyze cost elements (materials, labor, overheads).
To help with budgeting, cost control, and decision-making.

✅ Structure and Typical Order of Cost Components in a Cost Sheet

The components of a cost sheet are listed in a logical progression from raw materials to final sale. Here’s the standard format and order:

🔹 1. Direct Costs (to calculate Prime Cost):

These are costs that can be directly traced to the product.

Direct Material Consumed
(Opening Raw Material + Purchases – Closing Raw Material)
Direct Labour
Direct Expenses

$Prime Cost = Direct Material + Direct Labour + Direct Expenses$

🔹 2. Factory or Works Overheads (to calculate Factory/Works Cost):

Includes indirect material, indirect labor, factory rent, depreciation on machinery, etc.

$Factory Cost (or Works Cost) = Prime Cost + Factory Overheads$

(Add/Subtract: Opening and Closing Work-in-Progress if applicable)

🔹 3. Administrative Overheads (related to production only):

Office expenses related to production (not general administration)

$Cost of Production = Factory Cost + Administrative Overheads$

(Add/Subtract: Opening and Closing Finished Goods Stock)

🔹 4. Selling and Distribution Overheads:

Costs involved in selling the product and delivering it to customers (advertising, transport, sales commission)

$Cost of Sales = Cost of Production + Selling & Distribution Overheads$

🔹 5. Profit and Selling Price (if required):

Profit is added to the Cost of Sales to arrive at the Selling Price.

$Selling Price = Cost of Sales + Profit$

✅ Summary Table of Cost Sheet Format

Component	Explanation
Direct Material Consumed	Raw materials used in production
+ Direct Labour	Wages paid to workers directly involved
+ Direct Expenses	Costs directly attributable
= Prime Cost	Basic cost of manufacturing
+ Factory Overheads	Indirect production-related costs
= Factory/Works Cost	Total cost incurred inside the factory
+ Administrative Overheads	Office costs related to production
= Cost of Production	Cost till goods are ready for sale
+ Selling & Distribution Overheads	Costs to sell and deliver the product
= Cost of Sales	Final cost before profit
+ Profit (if included)	Desired markup
= Selling Price	Final price to be charged

✅ Use of a Cost Sheet

Internal Decision-Making: Pricing, budgeting, and cost control.
Cost Control: Identifying areas of high expenditure.
Performance Measurement: Comparing standard vs. actual costs.