Cost Sheet : Meaning, Importance, Types, Components, Format & Example

What is a Cost Sheet?

A cost sheet is a financial document that provides the details of costs that the business has incurred in producing a particular product during a specific period. Cost Sheet is designed to provide a detailed breakdown of the various costs incurred during the production process. It shows various elements of cost, like prime cost, factory cost, cost of production, and total cost. Cost Sheet is a periodic statement which is prepared at regular intervals, e.g., weekly, monthly, yearly, etc. The preparation of a cost sheet at regular intervals helps the management to track and manage all expenses related to the production of a particular product effectively.

According to Harold J. Wheldon, “Cost sheets are prepared for the use of the management and consequently, they must include all the essential details which will assist the management in checking the efficiency of production.”

Geeky Takeaways:

• The cost sheet records all the transactions involved from the production of goods to sales, i.e., from raw materials to the expenses related to selling and distribution of goods.
• The cost sheet provides all the relevant data related to cost, which helps the business to make informed decisions related to production and cost control.
• The term “Cost Sheet” is also used to describe a Statement of Cost, Statement of Cost, and Profit or Cost Statement.

Importance of Cost Sheet

1. Reveals the Total Cost and Cost Per Unit: The cost Sheet provides data related to the cost incurred in the production of a particular product. This cost data provides both the total cost and per unit cost of the product. 

2. Provides Information: The cost Sheet shows the cost incurred in the production of a product at every production level. This includes the cost of raw materials used, wages paid to laborers, cost incurred in administrative works, and cost of selling and distribution.

3. Determination of Selling Price: The cost sheet helps in fixing the selling price of the product. With in-depth information on the cost incurred on production, management can decide the selling price for its product through which it not only covers all its expenses but also earns an optimum profit.

4. Decision Making: Cost Sheet helps the firm in decision-making. The cost data provided by the cost sheet helps in making a wide range of decisions, such as decisions related to the purchase of raw materials and equipment, fixing of selling prices, choosing the best inventory methods for cost-saving, etc. 

5. Tracking of Expenses: The cost Sheet helps in tracking the expenses incurred in production. The cost Sheet provides in-depth cost data from every production level, so management can easily keep tabs on all the expenses. This enables the company to pinpoint the areas where corrective measures can be taken to improve efficiency.

6. Preparation of Tenders: The cost sheet helps in the preparation of tenders. An estimated cost sheet is used to quote prices to the management. Cost data from previous cost sheets is used to prepare tenders and quotations and estimate price changes.

Types of Cost Sheet

1. Historical Cost Sheet: The Historical Cost Sheet, which is prepared on a historical cost basis, uses the actual cost incurred in production. The Historical Cost Sheet helps us obtain an accurate picture of the actual cost incurred during the production of a product.

2. Estimated Cost Sheet: The Estimated Cost Sheet is based on the estimated cost and is prepared just before production. The management uses an estimated cost sheet to quote the prices of the products in advance or while submitting tenders for goods to be supplied. The estimated cost sheet predetermines the cost of direct materials, direct labor, and other overheads based on past costs, present market conditions, and anticipated changes in future price levels.

Components of Cost Sheet

1. Prime Cost

Prime Cost is the aggregate of direct material cost, direct labor cost, and direct expenses. Prime Cost has alternative names such as basic cost, first cost, or flat cost.

Prime Cost = Direct Material + Direct Labour + Direct Expenses

• Direct Material Cost is the cost of raw materials that are directly consumed or used in the production process. For example, the cost of leather used for manufacturing shoes, the cost of cloth used in garments, etc.

Direct Material = Opening Stock of Raw materials + Purchases + Expenses on Purchases – Closing Stock of Raw Materials

• Direct Labour Cost includes wages paid to workers who were directly engaged in the production process. People also refer to it as productive wages. For example, wages paid to machine operators, tailors, carpenters, weavers, etc.
• Direct Expenses are the additional expenses which are incurred during the production process. Chargeable expenses are another name for it. For example, equipment maintenance, royalty paid in mining, cost of patent rights, hire of special plant for production, etc.

2. Factory Cost

Factory Cost is the sum of prime cost and factory overheads. Factory Cost is known by other names such as works cost, production cost, or manufacturing cost.

Factory Cost = Prime Cost + Factory Overheads

Overhead are the expenses which are not directly related to production but are essential. Factory Overheads are the expenses that are concerned with the production function. It includes the cost of coal, lubricating oil, nuts, and bolts, stationery used in the factory, small tools, salary paid to the supervisor, and works manager and wages paid to the watchman, cleaner, factory rent, depreciation on the plant, factory lighting and power, repairs, etc.

3. Cost of Production

Cost of Production is the sum of Factory Costs and Office and Administrative Overheads. It is also known as office cost or administration cost.

Cost of Production = Factory Cost + Office & Administrative Overheads

Office and Administrative Overheads are the indirect expenses incurred on general management and administration functions. It includes salary paid to office staff, managing director and remuneration paid to the directors of the company, stationery used in the administrative office, postage, rent of office building, office lighting, legal expenses, depreciation on office furniture and equipment, etc.

4. Cost of Sales or Total Cost

It is the sum of the cost of production and selling and distribution overheads.

Total Cost = Cost of Production + Selling & Distribution Overheads

Selling and Distribution Overhead are expenses incurred on marketing, selling, and distribution of products. It includes the cost of packaging material, expenses incurred on advertisement, traveling expenses, carriage outwards, rent of warehouse, insurance of goods in transit, bad debts, etc.

How to Prepare a Cost Sheet?

Following are the steps followed while preparing a cost sheet are:

Step 1: The first step is to find the prime cost. Calculation of prime cost includes adding all the direct costs, like direct materials, direct labor, and direct materials.

Step 2: After finding the prime cost, the next step is to find the factory cost. Factory Cost is the sum of prime cost and factory overheads. Additionally, we include the opening stock of work-in-progress and subtract the closing stock of work-in-progress.

Step 3: The third step is to calculate the cost of goods sold. COGS is the sum of factory cost, office and administrative overheads, and opening stock of finished goods and we deduct the closing stock of finished goods.

Step 4: In this step, the total cost is calculated by adding selling and distribution overheads to the cost of goods sold to find the total cost.

Step 5: The last step is to find Total Sales. Sales is the sum of total cost and profit. In case of loss, the amount is subtracted from the total cost.

Format of Cost Sheet

Cost Sheet Example

Example:

Following is the cost record of ABC Ltd. Prepare the cost sheet.

Solution:

Uses & Benefits of Cost Sheet

1. Determination of Cost: The main purpose of the cost sheet is to provide the management with relevant cost data so that the accurate cost of the product can be ascertained. The cost sheet provides data related to costs incurred at every production stage, which helps in ascertaining the total cost and the cost per unit of the product.

2. Determination of Selling Price: The cost sheet plays a very important role in fixing the selling price of the product. Since the cost sheet provides a detailed breakdown of the cost incurred in the production of a particular product, it enables the business to formulate a pricing policy that not only covers all the expenses incurred but could also generate an optimal profit margin. Accurate cost data from the cost sheet helps to set a competitive pricing strategy.

3. Comparative Study of Cost: The cost sheet also facilitates the comparative study of the cost of the current period with that of the previous period for the same item. Comparison of cost helps the management to understand how the cost varies over time. By comparing costs, management can easily identify areas where cost control and reduction are needed and can take corrective measures accordingly.

4. Cost Control and Reduction: The cost sheet provides in-depth details of the cost incurred by the firm from the production of a product to its sale. It helps the business to monitor and manage its expenses. Through studying a cost sheet, a business can identify the areas where the cost needs to be controlled and reduced. It helps the business to make an informed decision to optimize performance and improve profitability.

5. Decision Making: The cost Sheet helps the business greatly in the decision-making process. Cost Sheet provides all the information related to the cost of production. It helps the business in formulating strategies related to pricing, production, and resource allocation. After considering the cost sheet, the business makes various decisions such as increasing or decreasing the production of a particular product, purchasing equipment, quoting the price in the tender, and implementing cost-saving measures.

Limitations of Cost Sheet

1. Time Consuming: The preparation of a cost sheet is a time-consuming process. Before preparing the cost sheet, one needs to compile detailed data on costs from different levels of production. These detailed data related to cost help the company to prepare the cost sheet accurately. Also, while preparing an estimated cost sheet, the management must analyze past data related to cost, current market conditions, and price trends.

2. Lack of Accuracy: The cost Sheet involves several assumptions and estimates, especially while estimating costs and allocating indirect costs. These assumptions and estimates, if not calculated correctly, could result in inaccurate cost data, which will affect the reliability of data and may lead to wrong decision-making.

3. Overlooks Non-Monetary Factors: Another limitation of the cost sheet is that it only considers monetary factors and ignores the non-monetary factors. Non-monetary factors cannot be measured in terms of money but greatly influence the business and its decision-making. Non-monetary factors like quality of the product, employee motivation, brand image, etc are not taken into account while preparing the cost sheet but these factors have a great impact on the business and its decision-making.

Difference Between Cost Sheet and Financial Statement

Basis	Cost Sheet	Financial Statement
Meaning	A cost sheet is a financial document that provides the details of costs that the business has incurred in producing a particular product during a specific period.	Financial statements are formal records of the financial activities of a business that provide an overview of its financial conditions.
Emphasis	The main emphasis is on cost ascertainment and cost control.	The main emphasis is on the determination of the financial position and profitability of the company.
Basis	Cost Sheets can be prepared either on actual cost or estimated cost basis.	Whereas, the financial statement is prepared on actual figures at the end of the financial year.
Tenders & Quotations	The cost Sheet is used for submitting tenders and quotations.	Financial Statements play no role in the submission of tenders and quotations.
Time Period	Cost Sheet is prepared for a specific period. For example, daily, weekly, monthly, or yearly, etc.	A Financial Statement is prepared on a yearly basis.
Uses	The cost Sheet is meant for internal users like the management.	Financial Statement is mainly intended for external users like investors, shareholders, government, etc.
Publication & Audit	The cost Sheet is for internal use and thus neither published for general public use nor is required to be audited by CA.	Financial Statements published for general public use are required to be audited by CA.

Cost Sheet Software & Tools

1. Spreadsheet Software: Spreadsheet Software is a widely used tool for preparing cost sheets. Businesses commonly use spreadsheet tools like MS Excel, Google Sheets, and Libre Office Calc because of their versatile interface. Businesses can create customized cost sheets for their specific needs. Spreadsheet software allows businesses to create and update cost estimates, track actual costs and variances, and generate charts and reports to facilitate decision-making. These software tools are easy to use and are most suitable for small businesses.

2. Estimating Software: Estimating software like PlanSwift, ProEst, RSMeans, etc offers tools that help the business in preparing and maintaining detailed cost estimates. These software tools are based on industry standards and consider historical data and project specifications before providing cost estimates. Businesses can adjust the estimates per their needs and different scenarios, such as changes in scope, materials, labor, or contingencies. Estimating software helps in saving time by reducing human effort and helps the business to improve its efficiency. However, estimating software requires regular updates, training, and integration with other software.

3. Accounting Software: Specialised accounting software like Quickbooks, Xero, and Sage offer dedicated cost tracking modules, which assist the firm in cost tracking and analysis. Accounting software provides advanced features for expense categorization, cost allocation, and integration with financial processes. These software tools help the business streamline its accounting process by recording financial transactions and providing reports for analysis of its profitability and financial position all in one place. It helps the firm to comply with the regulations and optimize its financial performance. These kinds of software are suitable for all kinds of organizations. 

4. Cloud-Based Software: Cloud-based software like Net Suite and Fresh Books offers real-time cost tracking and collaboration features. These software tools are easy to integrate with other business software. These software tools find extensive use in businesses that require remote access and centralized data storage. 

Conclusion

The cost Sheet is an invaluable component for effective decision-making. The cost data provided by the cost sheet helps the business in making decisions related to production, purchase of materials and equipment, cost savings, and even fixing of selling price. Cost Sheets assist the firm in keeping track of all the expenses related to production and help the firm to adapt to changes in the market effectively and efficiently.

Frequently Asked Questions (FAQs)

What is a cost sheet?

Cost Sheet is a document designed to provide a detailed breakdown of various costs incurred during the production process. It shows various elements of cost, like prime cost, factory cost, cost of production, and total cost.

Is a Cost Sheet a financial statement?

No, the cost sheet is not a financial statement. Cost Sheet is a financial document which shows the expenses that the firm has incurred in producing a particular product.

What are the main components of the cost sheet?

The key components of the cost sheet include direct materials, direct labor, direct expenses, factory overheads, administration overheads, and selling and distribution overheads.

What are the items which are not included in the cost sheet?

Several items are not included in the cost sheet such as cash discount, interest paid, preliminary expenses written off, goodwill written off, provision for tax, provision for bad debts, transfer to reserves, income tax paid, dividend paid, damages payable at law, and pension and gratuity.

What is the treatment of stock of Work-in-Progress in the cost sheet?

The stock of work-in-progress is the stock of semi-finished goods. While preparing the cost sheet, we add the opening stock of work-in-progress to the prime cost along with factory overheads and then subtract the closing stock of work-in-progress from it.

What is the treatment of the stock of Finished Goods in the cost sheet?

In the cost sheet, we add the opening stock of finished goods to the cost of production and subtract the closing stock of finished goods from it. The resulting figure is known as the cost of goods sold.