The Cost Sheet, and the Order Its Lines Must Take
Chapter Four
Syllabus topic 3, "Prepare Cost sheet/statement for production of goods and providing of services"
Pages 9 to 11 of 82
In one line
A cost sheet builds the cost of a period's output in four cumulative stages, adjusting raw material stock inside direct material, work-in-progress at factory cost, and finished goods after cost of production.
The format
| Particulars | Amount |
|---|---|
| Opening stock of raw material | x |
| Add: Purchases of raw material | x |
| Add: Carriage inward, freight, duty on purchases | x |
| Less: Closing stock of raw material | (x) |
| Raw material consumed | x |
| Add: Direct wages | x |
| Add: Direct expenses | x |
| PRIME COST | x |
| Add: Factory overhead | x |
| Add: Opening work-in-progress | x |
| Less: Closing work-in-progress | (x) |
| FACTORY COST | x |
| Add: Administration overhead | x |
| COST OF PRODUCTION | x |
| Add: Opening stock of finished goods | x |
| Less: Closing stock of finished goods | (x) |
| COST OF GOODS SOLD | x |
| Add: Selling and distribution overhead | x |
| COST OF SALES | x |
| Add: Profit | x |
| SALES | x |
Learn it downward. Each bold line is a stage, and each stage is the one above plus one block of cost.
The three stocks, and why each sits where it does
Raw material stock sits INSIDE direct material. What is wanted is the material consumed, and consumption is opening stock plus purchases less closing stock. It cannot go anywhere else, because raw material has not yet entered production.
Work-in-progress sits at FACTORY COST. Factory cost is the cost of production completed. Work begun and not finished must come out; work begun last period and finished this one must come in. It is adjusted after factory overhead because partly finished units have already absorbed some overhead.
Finished goods stock sits after COST OF PRODUCTION. It converts the cost of what was produced into the cost of what was sold. It cannot go earlier, because finished goods have borne administration overhead.
| Stock | Adjusted | Because |
|---|---|---|
| Raw material | Inside direct material | Consumption is what is wanted |
| Work-in-progress | At factory cost | Factory cost is completed production |
| Finished goods | After cost of production | It converts produced into sold |
Carriage inward and carriage outward
Carriage inward is a cost of bringing material in, so it is part of direct material and goes in at the top.
Carriage outward is a cost of delivering to the customer, so it is selling and distribution overhead and goes in at the bottom.
They are eight lines apart and a question that gives both is testing exactly that.
Items that never enter a cost sheet
Purely financial items are excluded, and listing them is worth a mark:
- interest paid or received; dividend received;
- profit or loss on the sale of an asset or investment;
- income-tax; donations; charity;
- writing off goodwill, preliminary expenses or discount on shares;
- abnormal losses - abnormal wastage, loss by fire, abnormal idle time;
- appropriations of profit - transfer to reserve, dividend paid.
The Cost Sheet, and the Order Its Lines Must Take
They are the reconciliation list. Every one of them explains part of the difference between the cost profit and the financial profit.
Sale of scrap
Scrap is the residue of production that has a small recoverable value - metal turnings, offcuts, sweepings. It is not a defective product; it is what is left over when a good one has been made.
Normal scrap is credited to cost, because the material was bought and part of it was always going to become scrap. Where it is credited depends on what the question tells you:
| The scrap is | Deduct its sale value from |
|---|---|
| Scrap of raw material, identified with the material | Material consumed |
| Scrap arising in the factory, not identified with any job | Factory overhead, or from factory cost |
| Abnormal scrap, from a breakdown or an accident | Nothing. It goes to Costing Profit and Loss |
The safe rule in an examination: unless the question identifies the scrap with a material or a job, deduct the sale of scrap in arriving at factory cost, and say in a working note that you have done so.
Do not add it to sales. Scrap is not the product, and treating its sale as revenue overstates both sales and cost.
Primary and secondary packing
Primary packing is part of production; secondary packing is part of selling.
| What it is | Where it goes | |
|---|---|---|
| Primary | Packing without which the product cannot be sold at all - the tube for toothpaste, the bottle for a medicine, the tin for oil | Factory overhead, part of the cost of production |
| Secondary | Packing for carriage and display - the carton holding twenty tubes, the crate, the wrapping for transport | Selling and distribution overhead |
The test is whether the product exists without it. Toothpaste with no tube is not a product; toothpaste in a tube without a carton still is.
Profit on cost, and profit on sales
These are different percentages of different bases, and mixing them is a standard trap.
| Given | Profit is | Sales are |
|---|---|---|
| Profit is 25 per cent on cost | cost of sales × 25/100 | cost of sales + profit |
| Profit is 10 per cent on sales | cost of sales × 10/90 | cost of sales × 100/90 |
On sales, the denominator is not the cost. If profit is 10 per cent of sales, then cost of sales is the other 90 per cent, so the profit is ten ninetieths of the cost, not a tenth of it.
Cost of sales is Rs 4,50,000.
| Profit, Rs | Sales, Rs | |
|---|---|---|
| At 25 per cent on cost | 1,12,500 | 5,62,500 |
| At 10 per cent on sales | 50,000 | 5,00,000 |
Check the second line: Rs 50,000 on sales of Rs 5,00,000 is exactly a tenth. Taking a tenth of the cost instead would have given Rs 45,000, and the answer would have been wrong by Rs 5,000 with nothing on the page to show it.
The Cost Sheet, and the Order Its Lines Must Take
Cost per unit
Where the question gives the number of units, each stage can be divided by the units to give a cost per unit at that stage. A cost sheet with a units column beside the amount column is a fuller answer and costs nothing to produce.
Divide by the right quantity. Cost of production is divided by units produced; cost of sales by units sold. Where the two differ - and they differ whenever finished goods stock moves - using one figure for both is wrong.
What it does NOT mean
It is not a profit and loss account. No financial item enters it.
The stages are not optional. A cost sheet that jumps from prime cost to cost of sales has lost the marks for the two stages in between, even if the final figure is right.
Profit is a balancing figure only when sales are given. Where the question gives a percentage on cost or on sales, it is computed, not balanced.
Quick revision
- Four stages: prime cost, factory cost, cost of production, cost of sales.
- Raw material stock inside direct material; work-in-progress at factory cost; finished goods after cost of production.
- Carriage inward at the top, carriage outward at the bottom.
- No financial item enters: interest, dividend, tax, donation, abnormal loss, appropriations.
- Cost of production per unit uses units produced; cost of sales per unit uses units sold.
Test yourself
1. Where is work-in-progress adjusted, and why? At factory cost, after factory overhead has been added, because factory cost is the cost of production completed and partly finished units have already absorbed overhead.
2. How is raw material consumed computed? Opening stock of raw material plus purchases plus carriage inward and duty, less closing stock of raw material.
3. Where do carriage inward and carriage outward go? Carriage inward into direct material at the top of the sheet; carriage outward into selling and distribution overhead at the bottom.
4. Name four items that never appear in a cost sheet. Interest paid or received, dividend received, profit or loss on the sale of an asset, income-tax, donations, abnormal losses and appropriations of profit.
5. By what quantity is the cost of sales per unit computed? By units sold, not units produced.
Answer in one sentence
Set out the stages of a cost sheet. Raw material consumed, being opening stock plus purchases and carriage inward less closing stock, plus direct wages and direct expenses gives prime cost; plus factory overhead and adjusted for opening and closing work-in-progress gives factory cost; plus administration overhead gives cost of production; adjusted for opening and closing finished goods gives cost of goods sold; plus selling and distribution overhead gives cost of sales; and sales less cost of sales is profit.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.