MODULE V

PREPARATION OF COST SHEET

SYLLABUS
Cost Sheet-Objectives-preparation-Tender and Quotation-Reconciliation Statement-Need-
Reasons for disagreements in Profits-Preparation-Memorandum Reconciliation Account

Cost sheet – Meaning and Definition

A cost sheet is a statement prepared to ascertain the cost of a product or rendering a service by
collecting and accumulating the costs of materials, labour and overheads involved in the
production of the product or rendering of service.
It may be defined as a “detailed statement of the elements of cost incurred in production,
arranged in a logical order under different heads such as materials, labour and overheads,
usually prepared at short intervals of time.”
Advantages / Importance / Objectives of Cost Sheet
 Cost ascertainment
 Cost estimation
 Fixation of selling price
 Cost control and cost reduction
 Cost comparison
 Submission of quotation
Unit / Output Costing
It is the method of costing applied in such industries where production is continuous and the
units produced are identical. It is a method of ascertaining the cost per unit of a product. It is
applied where the output can be measured in convenient physical units. Unit cost is also known
as Single or Output cost.
Cost per unit = Total cost
No. of units
Components of Cost Sheet
All the elements are presented through a cost sheet are the components of cost sheet. They are:
1. Prime Cost: ICMA London defines prime cost as “the total cost of direct materials,
direct labour and direct expenses.” It is the aggregate of all direct costs namely direct
materials, direct labour and direct expenses.
Prime cost = cost of raw materials consumed + direct labour + direct expenses
2. Factory Cost: It refers to the total cost incurred in the production stage. It is the prime
cost plus the factory overhead costs. It is also known as works cost, production cost or
manufacturing cost.

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 3. Cost of Production: It refers to all costs that are incurred on management and
maintenance of records. it is also known as office cost.
Cost of production = Factory cost + Office & Administrative OH
4. Cost of Goods Sold: The value of goods in stock should be adjusted to find out the cost
of goods sold.
Cost of goods sold = Cost of production + cost of opening stock of finished goods- cost
of closing stock of finished goods.
5. Cost of Sales: Cost of sales is the sum total of cost of goods sold and selling and
distribution overheads.
6. Sales: It represents the amount at which goods are sold. If the sales exceed the cost of
sales, it is profit. If cost of sales exceeds sales, it will be loss.
Format of a Cost Sheet (MGU Jan 2022)
Cost sheet for the period………….. units produced…..
Elements of Cost Total Cost Cost Per Unit
Direct Materials:
Opening stock of raw material **
Add: Purchase of materials **
Add: Carriage on purchases **

**
Less: Closing stock of raw material **

Materials Consumed ** **
Direct wages (Productive wages) ** **
Direct expenses (Chargeable expenses) ** **

(i) Prime Cost ** **

Works overheads (Factory overheads) ** **
** **
Less: sale of scrap ** **
** **
Add: opening work-in-progress ** **
** **
Less: closing work-in-progress ** **
(ii) Works Cost ** **
Administration overheads ** **
(iii) Cost of Production ** **
Add: opening stock of finished goods ** ---
** **
Less: closing stock of finished goods ** ---
(iv) Cost of Goods Sold ** **
Selling and Distribution overheads ** **
(v) Cost of Sales (Total Cost) ** **
Profit ** **
Sales ** **

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Treatment of certain specific items
1. Direct materials:
Opening stock of raw material xxx
Add: Purchase of raw material xxx
Add: Carriage on purchases xxx
Less: Closing stock of raw material xxx
Materials Consumed xxx

2. Work-in-Progress xxx
Direct material xxx
Direct labour xxx
Direct expenses xxx
Prime Cost xxx
Add: Factory overhead xxx
Add: Opening W.I.P xxx
Less: Closing W.I.P xxx
Works Cost xxx

3. Stock of Finished Goods

Works cost xxx
Add: Administration Overheads xxx
Cost of Production xxx
Add: Opening stock of finished goods xxx
Less: Closing stock of finished goods xxx
Cost of Goods Sold xxx
Add: Selling and Distribution overheads xxx
Total Cost xxx
(Cost of Sales)

4. Factory Overheads
- Factory rent, rates and taxes
- Motive power
- Indirect material
- Factory lighting
- Depreciation and repairs of plant and machinery
- Oil and water
- Drawing office salary
- Research & Development Expenditure
- Experimental expenses
- Consumable stores
- Wages of foreman
- Estimating expenses

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 - Factory manager’s salary
- Other factory expenses

5. Administration Overheads
- Office rent, rate and taxes
- Printing and stationery
- Postage
- Office lighting and insurance
- Counting house salary
- Director’s fees
- Audit fees
- Legal expense
- Depreciation and repairs on furniture and office building
- Office manager’s salary
- General expense
- Staff salary
- Bank charges
- Gas and water
- Sundry office expense

6. Selling and Distribution Overheads

- Advertisements
- Commission allowed
- Discount
- Sales department expense
- Sales promotion expense
- Carriage outwards
- Bad debt
- Show room expense
- Branch office expense
- Market research expense
- Delivery van expense
- Warehouse expense
- Salary to sales personnel
- Other selling and distribution expense

7. Non Cost Items

These are the expenses which are excluded from the computation of cost. Eg: Donation,
income tax, debenture interest, transfer to reserve, provisions, etc.

Tender or Quotations: A tender or quotation is the price at which a producer is

prepared to supply a particular product. It has to be prepared by the producer very
carefully.

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 RECONCILIATION STATEMENT (MGU Jan 2022)
A profit reconciliation statement is defined as “a statement prepared at the end of an
accounting period either by the cost accountant or by the financial accountant in order
to verify the correctness of cost and financial accounts as well as to explain the causes
for disagreement in profits.”

Need for Reconciliation Statement (MGU Jan 2022)

 Helps in checking the arithmetical accuracy

 To know the reasons for disagreement in profits
 Helps in facilitating internal control
 Promotes co-ordination and co-operation between cost and financial sections
 Cost data becomes more reliable.
Possible causes of difference and their effect on profit
Causes of difference Effect on profit in Effect on profit in
Cost Books Financial Books
1. Items debited in financial More Less
accounts only
2. Items credited in financial Less More
accounts only
3. Over absorption of overheads in Less More
cost accounts
4. Under absorption of overheads More Less
in cost accounts
5. Items debited in cost accounts Less More
only
6. Excess depreciation charged in Less More
cost accounts
7. Excess depreciation charged in More Less
financial accounts
8. Higher value of opening stock or Less More
Lower value of closing stock in
cost accounts
9. Lower value of opening stock or More Less
Higher value of closing stock in
cost accounts

Reasons for disagreement in profits (MGU Jan 2022)

The following are the reasons responsible for the disagreement in profit or loss shown by
the two sets of accounts:
1. Items shown only in financial accounts: There are a number of items which appear
only in financial accounts, and not in cost accounts. These may be classified into two:
a. Items debited in Financial Accounts only:
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 Purely Financial Charges:
Interest on debenture
Loss on sale of fixed assets
Loss on sale of investments
Fines and penalties
Provision for bad debts
Preliminary expenses written off
Goodwill written off
Loss due to obsolescence
Discount an issue of shares and debentures written off
Donation and charities.
Appropriation of Profits:
Income tax on profit
Dividend to share holders
Bonus paid out of profit
Transfer to reserve
Transfer to dividend equalisation fund or sinking fund.
b. Items credited in Financial Accounts only:
Interest received on bank deposits
Income from investments
Dividend received
Rent received
Transfer fee received
Profit on sale of fixed assets
Profit on sale of investments
Bad debt recovered.
2. Items shown only in cost accounts: There are certain items which are included in cost
accounts and are not included in financial accounts. These are notional charges for
which no cash is paid. The following are the items debited in cost accounts only.
 Interest on own capital used for business
 Rent on own building used for business
 Depreciation on fully depreciated assets still in use.
3. Under or over absorption of overheads: If the overhead recovered in cost accounts is
less than actual amount of overhead charged in financial accounts, it is called under
absorption. On the other hand, if the amount recovered in cost book is more, it is called
over absorption. The under recovery or over recovery of overheads may be transferred
to costing Profit and Loss account or may be carried to the next period. This will lead
to difference in profit that shown by both the set of books.
4. Different methods of charging depreciation: In Cost accounts and Financial accounts
different methods are used for charging depreciation on fixed assets. When methods are
different or rates of depreciation charged are different, there will be difference in the
amounts of depreciation charged in the two sets of accounts. It would cause difference
in profit or loss in two sets of accounts.
5. Difference in the bases of stock valuation: In financial accounts stock is valued at
cost or market price whichever is less. But in cost accounts, stock is valued at cost.
When the bases of stock valuation adopted in the two set of accounts are different, it
would cause difference in profit or loss in the two sets of books.

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Procedure of Reconciliation
statement may be prepared:
1. Starting with profit as per Cost Accounts
2. Starting with profit as per Financial Accounts
3. Starting with loss as per Cost Accounts
4. Starting with loss as per Financial Accounts
Reconciliation The following steps shall be taken to prepare a reconciliation statement.
1. Ascertain the various items and amounts caused for disagreement in profits.
2. If costing profit is taken as the base:
Add:
Income credited to financial accounts only
Notional charges in cost accounts only
Value of closing stock taken more in financial accounts
Value of opening stock taken less in financial accounts
Overheads charged more in cost accounts
Depreciation charged less in financial accounts
Abnormal gain taken only in financial accounts
Deduct:
Items of expenses charged only in financial accounts
Under absorption of overheads in cost accounts
Excess depreciation in financial accounts
Closing stock valued less in financial books
Opening stock valued more in financial books
Any abnormal loss recorded in financial accounts only
Appropriation made in financial books.

Memorandum Reconciliation Account

A memorandum reconciliation account is an account prepared to reconcile the profit as
per cost books with that of the financial books.

Format of memorandum reconciliation account

To Financial expenses By Profit as per cost accounts

To Under absorption of overheads By financial income
To under valuation of opening stock in By imputed charges of rent and interest
cost accounts By over absorption of overheads
To over valuation of closing stock in By over valuation of opening stock in
cost accounts cost accounts
To profit as per financial accounts By under valuation of closing stock in
cost accounts

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 Important problems and solutions
Q.1 The following information relates to Bala Ltd.for the year ended 31.03.2016. sales
Rs.80,000; raw material Rs.24000; Labour Rs.18000; works overheads and office
expenses charged in cost accounts Rs.18000 stands in 2:1 respectively. The actual
expenses incurred are manufacturing Rs.13000; office Rs.5600; selling price includes
25% profit on sales. Prepare Trading, profit and loss account and cost sheet and
reconcile the profits shown by them. (MGU Jan 2022)
Solution:
Trading and P&L A/C for the year ending 31.03.2016
To Materials 24000 By Sales 80000
To Labour 18000
To Manufacturing exp 13000
To Office exp 5600
To Net Profit C/d 19400
80000 80000

Cost sheet for the year ending 31/03/2016

Material 24000
Labour 18000
Prime Cost 42000
Works Overhead (18000 x 2/3) 12000
Factory Cost 54000
Add: Office overhead (18000 x 1/3) 6000
Cost of Production 60000
Profit (60000 x 1/3) 20000
Sales 80000

Profit Reconciliation Statement

Profit as per Cost books 20000
Add: over absorption of office overhead in cost books 400 400
20400
Less: under absorption of works overhead in cost books 1000 1000
Profit as per Financial accounts 19400

Q. 2 The mature company furnishes the following information on 31st December 2017.
Opening raw material Rs. 16000; Closing raw material Rs. 18000; Raw material purchased
Rs.240000; Direct labour Rs.180000; Direct expense Rs.5000; Works overhead @75% on
direct labour cost; Administration overhead @ 10 % of sales; Selling and distribution overhead
@ 15% of sales; Opening work in progress Rs.16000; closing work in progress Rs. 10000;
opening finished goods Rs.5000; closing finished goods Rs.13000; Sales Rs.650000. Prepare
a cost sheet. (MGU Jan 2022)
Solution:
Cost sheet for the year ending 31st December 2017
Particulars Total Cost (Rs.)

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 Opening stock of raw material 16000
Add: Purchases 240000
256000
Less: Closing stock of raw material 18000
Direct Material Consumed 238000
Direct wages 180000
Direct expenses 5000
Prime Cost 423000
Add: Works overheads (75% of direct labour) 135000
Add: Opening work in progress 16000
574000
Less: Closing work in progress 10000
Works / Factory Cost 564000
Add: Office overheads 65000
Cost of Production 629000
Add: Opening stock of finished goods 5000
Cost of goods available for sale 634000
Less: Closing stock of finished goods 13000
Cost of Goods Sold 621000
Add: Selling and distribution overheads (15% of sales) 97500
Cost of Sales 718500
Loss 68500
Sales 650000
Note: Works overheads may be 7.5% of direct labour. In that case the cost sheet will show a
Profit of Rs. 53000.
Q.3 The following information are obtained from books of Arun Ltd.for the year ending 31st
March 2019. Materials used- Rs. 120000; Direct wages Rs.12000; Factory overheads Rs.5000;
Administration overheads Rs.5000. prepare cost sheet and the price which the company should
quote for the manufacture of a machine requiring materials Rs.10500; Direct wages Rs. 1500;
so that the price may yield a profit of 25% on cost. (MGU Feb 2021)
Solution:
Statement of cost for the year ended 31st March 2019
Particulars Rs.
Direct material 120000
Direct wages 12000
Prime cost 132000
Factory overheads 5000
Factory cost 137000
Administration overheads 5000
Cost of production 142000

Calculation of price at which the article should be quoted

Particulars Rs.

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 Direct materials 10500
Direct wages 1500
Prime cost 12000
Factory overheads (1500 x 5000/12000) 625
(Factory OH is to be taken as percentage of direct wages) Or
Factory overheads (12000 x 5000/ 132000) 454.55
Factory Cost 12625 or 12454.6
Administration overheads
12625 x 5000 / 137000) or (12454.6 x 5000/ 137000) 460.8 or 454.55
Cost of production 13085.8 or 12909.15
Profit (13085.8 x 25 / 100) or (12909.15 x 25/100) 3271.25 or 3227.29
888Selling price 16357.05 or 16136.44

Q No. 24 (MGU Feb 2021)

Statement of price for the month of June 2016
Particulars Rs. Per unit cost
Direct materials 25000 1.25
Direct wages 5000 0.25
Prime cost 30000 1.50
Factory OH (500 x 5) 2500 0.125
Factory cost 32500 1.625
Administration OH (32500 x 20/100) 6500 0.325
Cost of production 39000 1.95
Less: closing stock 3900
Cost of goods sold 35100 1.95
Selling OH(18000 x 0.25) 4500 0.25
Cost of sales 39600 2.20
Profit 41400 2.30
Sales (18000 x 4.5) 81000 4.50

Q No. 25 (MGU Feb 2021)

Statement of cost and profit for the year 2017
Particulars Rs.
Purchase of materials 180000
Add. Opening stock 30000
Less. Closing stock 45000 165000
Wages 75000
Prime Cost 240000
Factory overheads (24000 x 25/100) 60000
Factory Cost 300000
Administration overheads (60000 x 75/100) 45000
Cost of Production 345000
Add. Opening stock of finished goods 60000

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 Less. Closing stock of finished goods 15000 45000
Cost of Goods Sold 390000
Profit 97500
Selling Price 487500

Statement of Profit and Loss Account

Particulars Rs. Particulars Rs.
To Op.Stock of raw materials 30000 By Sales 487500
To Op.Stock of finished goods 60000 Cl.Stock of raw materials 45000
To Purchase of raw materials 180000 Cl.Stock of finished goods 15000
To Wages 75000
To Works expenses 58125
To Administration expense 45750
Gross profit 98625
547500 547500

Here the difference is due to two reasons

1. Over absorption of overheads
2. Under absorption of office or administration overheads
Reconciliation Statement
Particulars Rs.
Profit as per cpst accounts 97500
Add. Works overheads over absorbed 1875
99375
Less. Administration overheads under absorbed 750
Profit as per Financial Accounts 98625

Q. No. 20 (MGU Jan 2022)

Cost sheet units 2500
Particulars Total Cost/unit
Raw material 25000 10.00
Wages 5000 2.00
Direct expense 2500 1.00
Prime Cost 32500 13.00
Machine expenses (2500 @ 2.50) 6250 2.50
Factory Cost 38750 15.50
Office overheads (5000 x 20/100) 1000 0.40
Cost of Production 39750 15.90

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Memorandum Reconciliation Account
A memorandum reconciliation account is an account prepared to reconcile the profit as per cost
books with that of the financial books.
Format of Memorandum Reconciliation Account
To financial expenses By profit as per cost accounts
To under absorption of overheads By financial income
To under valuation of opening stock in cost By imputed charges of rent and interest
accounts By over absorption of overheads
To over valuation of closing stock in cost By over valuation of opening stock in cost
accounts accounts
To profit as per Financial Accounts Under valuation of closing stock in cost
accounts

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