How to Prepare the Cost Sheet? (Step by Step)


          In the earlier article we have discussed Cost Accounting, Advantages of Cost Accounting, Elements of Cost and also difference between the Financial Accounting and Cost Accounting. Today in this article we will be discussing cost sheet meaning, format of cost sheet, why do we prepare cost sheet and how to prepare the cost sheet.

Cost Sheet

          Cost Sheet is a statement which reflects all the details of the cost of production along will the office overhead, selling and distribution overhead that have incurred during production of a particular goods or service. It also include the profit margin also.

Why do we need to Prepare Cost Sheet

          Cost Sheet is prepared for various purposes mainly for the following reasons,
§  To determine the selling price of the product or service based on cost of production.
§  To determine the cost of production.
§  To determine the cost per unit and total cost.
§  To set the profit margin.
§  Helps to compare the cost with the past cost data to make better decision on cost of production.
§  It helps management to formulate  the appropriate production policy.
§  It will help management in various purposes regarding the production and gain more insights about cost of production for making better informed decision.

Format of Cost Sheet

Elements of Cost
Total Cost
Cost Per Unit
Direct Material
XXX
XXX
Direct Labour
XXX
XXX
Direct Expenses
XXX
XXX
Prime Cost
XXX
XXX
Add: Factory Overhead
XXX
XXX
Less: Sale of Scrap
XXX
XXX
Add : Opening Stock of WIP
XXX
XXX
Less : Closing Stock of WIP
XXX
XXX
Factory Cost/ Works Cost
XXX
XXX
Add : Office Overhead
XXX
XXX
Cost of Production
XXX
XXX
Add : Opening Stock of Finished Goods
XXX
XXX

XXX
XXX
Less : Closing Stocks of Finished Goods
XXX
XXX
Cost of Goods Sold
XXX
XXX
Add: Selling & Distribution Overhead
XXX
XXX
Total Cost
XXX
XXX
Add: Profit
XXX
XXX
Selling Price
XXX
XXX
 

How to Prepare Cost Sheet

          In order to prepare the Cost Sheet follow the following steps,

§  §  Step 1:

 To obtain Direct Cost add up Opening Cost + Purchases – Closing Stock of Material together then add Direct Cost plus Direct Labour and Direct Expenses in order to obtain the Prime Cost i.e. (Direct Cost = Opening Cost + Purchases - Closing Stock of Material )(Prime Cost = Direct Cost + Direct Labour Cost + Direct Expenses).

§  Step 2 :

 Now you have got Prime Cost. Now add factory overhead deduct sale of scrap and again add opening stock in work in progress and then finally deduct closing stock of work in progress to get Factory Cost or Work Cost. ( Prime Cost + Factory Overhead - Sale of Scrap + Opening Stock of WIP – Closing Stock of WIP = Factory Cost )

§  Step 3 :

 Now you have got Factory Cost add up Office Overhead to obtain the Cost of Production. (Cost of Production = Factory Overhead + Office Overhead).

§  Step 4 :

 Now you have got Cost of Production. Add up opening stock of finished goods and deduct closing stock of finished goods to Cost of Production in order to obtain Cost of Goods Sold. (COGS = Cost of Production + Opening Stock of finished goods – Closing stocks of finished goods)

§  Step 5 :

 Now you have Cost of Goods Sold. Add up Selling and Distribution overhead to get total cost.(Total Cost = COGS + Selling and Distribution overhead)

§  Step 6:

Now add up Profit to total cost to get the selling price. (Selling Price = Total Cost + Profit).

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