MEANING OF COST

‘COST’ represents a sacrifice of values, a foregoing or a release

of something of value. It is the price of economic resources used as a
result of producing or doing the thing costed. It is the amount of
expenditure incurred on a given thing. Cost has been defined as the
amount measured in money or cash expended or other party
transferred, capital stock issued, services performed or a liability
incurred in consideration of goods and serviced received or to be
received. By cost, we mean the actual cost i.e. historical cost. ICWA
(UK) defines cost as the amount of expenditure (actual or notional)
incurred on, or attributable to a specified thing or activity.

CLASSIFICATION OF COST

Cost classification is the process of grouping costs according to

their common features. Costs are to be classified in such a manner
that they are identified with cost center or cost unit.

ON THE BASIS OF BEHAVIOUR OF COST

Behavior means change in cost due to change in output. On the

basis of behavior cost is classified into the following categories:

FIXED COST

It is that portion of the total cost which remains constant

irrespective of the output upto capacity limit. It is called as a period
cost as it is concerned with period. It depends upon the passage of
time. It is also referred to as non-variable cost or stand by cost,
capacity cost or “period” cost. It tends to be unaffected by variations
in output. These costs provide conditions for production rather than
costs of production. They are created by contractual obligations and
managerial decisions. Rent of premises, taxes and insurance, staff
salaries constitute fixed cost.
VARIABLE COST

This cost varies according to the output. In other words, it is a

cost which changes according to the changes in output. It tends to
vary in direct proportion to output. If the output is decreased,
variable cost also will decrease. It is concerned with output or
product. Therefore, it is called as a “product” cost. If the output is
doubled, variable cost will also be doubled. For example, direct
material, direct labour, direct expenses and variable overheads. It is
shown in the diagram below.

SEMI-VARIABLE COST

This is also referred to as semi-fixed or partly variable cost. It

remains constant up to a certain level and registers change
afterwards. These costs vary in some degree with volume but not in
direct or same proportion. Such costs are fixed only in relation to
specified constant conditions. For example, repairs and maintenance
of machinery, telephone charges, supervision professional tax, etc.

ON THE BASIS OF ELEMENTS OF COST

Elements means nature of items. A cost is composed of three

elements, material, labour and expenses. Each of these elements can
be direct and indirect.

DIRECT COST

It is the cost which is directly chargeable to the product

manufactured. It is easily identifiable. Direct cost consists of three
elements which are as follows:

• DIRECT MATERIAL

It is the cost of basic raw material used for manufacturing a

product. It becomes a part of the product. No finished product
can be manufactured without basic raw materials. It is easily
identifiable and chargeable to the product. For example, leather
in leatherwares, pulp in paper, steel in steel furniture,
sugarcane for sugarcane etc. what is raw material for one
manufacturer might be finished product for another. Direct
material includes the following:
 1. All materials specially purchased for production or the
process.
2. All components purchased for production or the process.
3. Material transferred from one cost center to another or
one process to another.
4. Primary packing materials, wrappings, cardboard boxes
etc, necessary for preservation or protection of product.

Some of the items like nails or thread in the store are a part of
finished product. They are not treated as direct materials in view of
negligible cost.

• DIRECT LABOUR OR DIRECT WAGES

It is the amount paid to those workers who are engaged in the

manufacturing line for conversion of raw materials into finished
goods. The amount of wages can be easily identified and directly
charged to the product. These workers directly handle raw
materials, work in progress and finished goods on the
production line. Wages paid to the workers operating lathes,
drilling, cutting machines etc are direct wages. Direct wages are
also as productive labour, process labour or prime cost labour.
Direct wages include the payment made to the following group
of workers:
1. Labour engaged on the capital production of the product.
2. Labour engaged in aiding the operations viz. Supervisor,
Foreman, Shop clerks and Worker on internal transport.
3. Inspectors, Analysts needed for such production.

• DIRECT EXPENSES OR CHARGEABLE EXPENSES

It is the amount of expenses which is directly chargeable to

the product manufactured or which may be allocated to product
directly. It can be easily identified with the product. For example,
hire charges of a special machine used for manufacturing a
product, cost of designing the product, cost of patterns, architects
fees/surveyors fees, or job cost of experimental work carried out
especially for a job etc. Cost of special drawings, cost of special
 layout designs, patents, patterns, cost of models, surveyors fees,
Excise duty, royalty on production, cost of rectifying defective
work. Utility of such expenses is exhausted on completion of job.

• INDIRECT COST

It is that portion of the total cost which cannot be identified

and charged directly to the product. It has to be allocated and
apportioned and absorbed over the units manufactured on a suitable
basis. It consists of the following three elements:

• INDIRECT MATERIAL

It is the cost of the material other than direct material which

cannot be charged to the product directly. It cannot be treated as a
part of the product. It is also known as expenses materials. It is the
material which cannot be allocated to the product but which can be
apportioned to the cost units. Examples are as follows:
1. Lubricants, cotton waste, oil, grease, stationery etc
2. Small tools for general use
3. Some minor items such as thread in dress making, cost of
nails in shoemaking etc

• INDIRECT LABOUR

It is the amount of wages paid to those workers who are not

engaged on the manufacturing line, for example, wages of workers in
administration department, watch n ward department, sales
department, general supervision.

• INDIRECT EXPENSES

It is the amount of expenses which is not chargeable to the

product directly. It is the cost of giving service to the production
department. It includes factory expenses, administrative expenses,
selling and distribution expenses etc.
 • OVERHEADS OR ON COST OR BURDEN OR
SUPPLEMNTARY COST

Aggregate of indirect cost is referred to as overheads. It

arises as a result of overall operation of a business. According to
Weldon overheads mean, ”the cost of indirect material, indirect
labour and such other expenses, including services as cannot
conveniently be charged direct to specific cost units”. It includes all
manufacturing and non-manufacturing supplies and services.
These costs cannot be associated with a particular product.
The principal feature of overheads is the lack of direct traceability
to individual product. It remains relatively constant from period to
period. The amount of overheads is not directly chargeable i.e. it
has to be properly allocated, apportioned and absorbed on some
equitable basis.

CLASSIFICATION OF OVERHEADS

• ON THE BASIS OF FUNCTIONS

• FACTORY OVERHEADS

It is the aggregate of all the factory expenses incurred

in connection with manufacture of a product. These are incurred in
connection with running of factory. It includes the items of
expenses viz, factory salary, work managers salary, factory repairs,
rent of factory premises, factory lighting, lubricants, factory power,
drawing office salary, haulage (cost of internal transport)
depreciation of plant and machinery unproductive wages,
estimation expenses, royalties, loose tools w/ off, material
handling charges, time office salaries, counting house salaries etc.

• ADMINISTRATIVE OR OFFICE OVERHEADS

It is the aggregate of all the expenses as regards

administration. It is the cost of office service or decision-making. It
consists of the following expenses: Staff salaries, printing and
stationery, postage and telegram, telephone charges, rent of office
premises, office conveyance, printing and stationery and repairs
and depreciation of office premises and furniture etc.

• SELLING & DISTRIBUTION OVERHEADS

It is the aggregate of all the expenses incurred in

connection with sales and distribution of finished product and
services. It is the cost of sales and distribution services.
Selling expenses are such expenses which are incurred
acquiring and retaining customers. It includes the following
expenses:

(a) Advertisement (b) Show room expenses (c) Traveling

expenses (d) Commission to agents (e) Salaries of Sales office (f)
Cost of catalogues (g) Discount allowed (h) Bad debts written off
(i) Commission on sales (j) Rent of Sales Room (k) Sample and
Free gifts (L) After sales service expenses (m) Expenses on
demonstration and technical advice to prospective customers (n)
Free repairs and servicing expenses (o) Expenses on market
research (p) Fancy packing and demonstration.

Distribution expenses include all those expense which are

incurred in connection with making the goods available to
customers these expense includes the following (a) Packing
charges (b) Loading charges (c) Carriages on sales (d) Rent on
warehouse (e) Insurance and lighting of warehouse (f) Insurance
of delivery van (g) Expense on delivery van (h) Salaries of
Godownkeeper, drivers and packing staff.
COST SHEET

For determination of total cost of production a statement

showing the various elements of cost is prepared. This statement is
called as a statement of cost or cost sheet. Cost sheet is a
statement which provides assembly of the detailed cost of a cost
center or a cost unit. It is a statement showing the details of a) total
cost of job b) Cost of an operation or order. It brings out the
composition of total cost in a logical order under proper
classifications & sub-divisions. The period is covered by the cost sheet
may be by a week a month or so. Separate columns are provided to
show total cost, cost per-unit etc. In case of different products there
are different cost sheets for different products. A cost sheet is
prepared under output or unit costing method.

PURPOSE OF COST SHEET

 1. It gives the break up of total cost under different elements.
2. It shows total cost as well as cost per unit.
3. It helps in comparison with previous years.
4. It facilities preparation of tenders or quotations.
5. It enables the management to fix up selling price.
6. It controls cost.

DIVISIONS OF COST

• PRIME COST

It comprises of all direct materials, direct labour and direct

expenses. It is also known as flat cost

Prime cost = Direct Materials + Direct Labour + Direct

Expenses

• WORKS COST

It is also known as a factory cost or cost of manufacture. It is

the cost of manufacturing an article. It includes prime cost and
factory expenses.

Works Cost = Prime Cost + Factory Overheads

• COST OF PRODUCTION

It represents factory cost plus administrative expenses.

Cost of Production = Factory Cost + Administrative

Expenses
 • TOTAL COST

It represents cost of production plus selling and distribution

expenses.

Total Cost= Cost of Production + Selling & Distribution

Expenses

• SELLING PRICE

It is the price which includes total cost plus margin of profit or

minus loss, if any.

Selling Price = Total Cost + Profit (-Loss)

NON COST ITEMS

Non-cost items are those items which do not form part of cost of
a product. Such items should not be considered while ascertaining the
cost of a product. These are items included in the Profit & Loss A/c.
These will not come in the cost sheet
a) Income tax
b) Interest on capital
c) Interest on loan
d) Profit on Sale of fixed assets
e) All the assets
f) Donations
g) Capital Expenditure
h) Discount on shares & Debentures
i) Commission to Partners, Managers etc
j) Brokerage
k) Preliminary Expenses Written off.
l) Wealth tax etc
 m)Bonus to directors and employees if it is based on profit,
expenses of raising capital, penalties & fines.

UTILITY OF COST SHEET

• DETERMINE THE TOTAL COST

A total cost sheet (statement) helps in determining aggregate

cost of manufacturing a product or providing a service.

• DETERMINING PRODUCT PRICE

A cost sheet helps in identifying the total cost for a product or

service which in turn helps in properly pricing of products &
services.

• COST REDUCTION OR COST CONTROL

Cost sheets helps in identifying the total cost stage wise & any
unwanted cost can be curtailed.

• PREPARE BUDGETS

A cost statement helps in preparing budget for each

department

• PROFIT PLANNING

It helps to minimize cost & increase profits.

1. STAGE WISE COST IDENTIFICATION

Costs such as prime cost, factory cost, cost of production,

cost of goods sold, total cost of sale etc.
 2. DETERMINE THE COST PER UNIT

This helps in determining cost per unit on which u can

predict further cost.

DETERMINATION OF TOTAL COST

Cost of product is determined as per cost attach concept. Total

cost of a product consists of various elements of cost which have the
quality of coherence. All the elements of cost can be grouped and
regrouped. Grouping and regrouping of various elements of cost leads
to significant divisions of cost. The logical process of determination of
cost by grouping and regrouping various elements is illustrated as
follows:
 COST SHEET
PROFORMA OF COST SHEET

PARTICULARS TOTAL
COST Rs.

Opening Stock Raw Materials

Add: Purchase
Add: Carriage Inward XXX
Add: Octroi and Customs Duty
Less: Closing Stock of Raw Materials XXX
Cost of Direct Material Consumed
Direct Wages XXX
Direct or Chargeable Wages
XXX
PRIME COST
XXX
Add: Works of Factory Overheads:
Indirect Materials XXX
Indirect Wages
Leave Wages XXX
Bonus to Workers
Overtime Wages XXX
Fuel and Power
Rent and Taxes
Insurance XXX
Factory Lightings
Supervision
Works Stationary XXX
Canteen and Welfare Expenses
Repairs XXX
Works Salaries
Depreciation of Plant and Machinery XXX
Works Expenses
Gas and Water XXX
Technical Director’s Fees
Laboratory Expenses XXX
Works Transport Expenses
Works Telephone Expenses XXX
Add: Opening Stock of Work-in-Progress
Less: Closing Stock of Work-in-Progress XXX
Less: Sale of Waste
XXX
WORKS COST
XXX

XXX
Add: Office and Administration
Overheads: XXX
Office Salaries
Directors Fees XXX
Office Rents And Rates
Office Stationary and Printing XXX
Sundry Office Expenses
Depreciation on Office Furniture XXX
Subscription to Trade Journals
Office Lightings XXX
Establishment Charges
Directors Traveling Expenses XXX
Consultants Fees
Contribution to Provident Fund XXX
Postage
Legal Charges XXX
Audit Fees
Bank Charges XXX
Depreciation And Repairs of Office
Equipments XXX
Bonus to Staff
XXX
COST OF PRODUCTION
Add :Opening Stock of Finished Goods XXX
Less: Closing Stock of Finished Goods
XXX
COST OF GOODS SOLD
XXX
Add: Selling and Distribution Overheads
Advertising XXX
Show Room Expenses
Salesman’s Salaries and Expenses
 Packing Expenses XXX
Carriage Outward XXX
Commission of Sales Agents XXX
Cost of Catalogues XXX
Expenses of Delivery Vans XXX
Collection Charges XXX
Traveling Expenses XXX
Cost Tenders XXX
Warehouse Expenses XXX
Cost of Mailing Literature XXX
Sales Manager’s Salaries XXX
Insurance of Showroom XXX
Sales Director’s Fees XXX
Sales Office Expenses XXX
Rent of Sales Office XXX
Depreciation of Delivery Vans XXX
Expenses of Sales Branch XXX
Establishments XXX
Branch Office Expenses XXX

TOTAL COST/TOTAL OF XXX

SALES
Profit or Loss XXX

SALES XXX
ESTIMATION OF COST

Very often, the management desires to know, ‘what will be the

cost?’ even before the production starts. The purpose to know the cost
before it is incurred, might be different. It may be to keep the cost
within control or it may be used for profit planning. May times it is
required to submit tenders, to give quotations, to prepare price lists
etc. For this purpose the estimations of “probable cost” of production
is essential. This requires the past cost data to be analysed, present
circumstances are taken into consideration and future is projected.
The technique is known as estimation of cost. This involves the study
of each and every element of cost and their nature of behaviour .
Keeping in view the nature of behaviour of elements of cost, it can be
classified into following three categories:

• FIXED COST

Fixed cost is that cost which remains unaffected even

though there is change in the level of output. It remains constant at
all levels of output for a given period of time. Examples of such costs
are rent, rated and taxes of factory premises, salary of general
manager, foreman, watchman, insurance, depreciation etc. These
expenses incur according to the unit of time and not according to
level of production. Hence sometimes it is called as periodic cost.
For example such fixed cost is ascertained of a particular concern Rs.
12000 pm. The capacity of this concern is to produce 1000 units pm.
If they produce 100 units or 500 units or 700 units or 100 units the
fixed cost will remain constant at all these levels of output.
This fixed cost remains fixed at all levels of output, but the cost per
unit changes if there is a change in the level of output.

• VARIABLE COST

It is the cost which tends to vary directly with the volume

of output. If there is increase in output this cost increases and vice
versa. The change in the variable cost takes place in the same
direction in which the level of output changes. This cost consists of
direct materials, direct wages, direct expenses and some part of
indirect expenses which varied according to the level of output. Say
for example if standard unit of final product requires the raw
materials of Rs.20 per unit the expenses on direct materials will
change if level of output changes. However variable cost per unit will
remain unchanged provided the price level does not change.

• SEMI-VARIABLE COST

This is the third category of nature of behavior of the

expenses. These expenses are neither fixed nor variable. These
expenses change in the same direction in which the level of output
changes. Thus these expenses are partly fixed partly variable in
nature. Examples of such expenses are depreciation of plant and
machinery, maintenance of factory building etc. These expenses will
increase if factory is run from single shift to double or triple shifts.
Depreciation and maintenance will increase but not in the same ratio,
the output increases. Thus these expenses are neither fixed nor
variable cent percent. Hence they are called as semi variable
expenses.
 CERTIFICATE

The following project has been satisfactorily performed by

Nikhil Abhyankar 01
Mangala Borkar 11
Sunil Chadda 12
Bhagyesh Gandhi 21
Avinash Dhone 17
Snehal Dolas 19
Roshan Kambli 38
Ketki Khandagale 43
Priyank Mehta 53
Abhijeet Motto 58
studying in Bhavans College, Class F.Y. BMS Div A during the
academic year 2008-2009
 DECLARATION

We hereby declare that this project namely COST SHEET is

done solely by our group, which consists of TEN people whose names
are given below
Nikhil Abhyankar 01
Mangala Borkar 11
Sunil Chadda 12
Bhagyesh Gandhi 21
Avinash Dhone 17
Snehal Dolas 19
Roshan Kambli 38
Ketki Khandagale 43
Priyank Mehta 53
Abhijeet Motto 58
under the expert guidance of our respected professor
Mrs. Riddhi Sharma. We further declare that the content of this
project is true and to the best of our knowledge.
Solved example of Cost Sheet

The accounts of Z ltd for the yr ended 31st Dec 2004, shows the
following:
Rs.
Work office salaries 6500
Administrative office salaries 12600
Cash Discounts Allowed 2900
Carriage Outward 4300
Carriage Inward 7150
Bad Debts Written Off 6500
Repairs to Plant & Machinery 4450
Rents, Rates, Taxes, Insurance etc
Factory 8500
Office 2000
Sales 461000
Stock of Raw Materials
1st Jan, 04 48000
31 Jan, 04
st
62000
Materials Purchased 185000
Traveling Expenses 2100
Travelers Salaries and Commission 7700
Productive Wages 126000
Depreciation on Plant & Machinery 6500
Depreciation on Office Furniture 300
Directors Fees 6000
Gas & Water (Factory) 1200
Gas & Water (Office) 400
Managers salary (1/4 office & ¾ Factory) 10000
General Expenses 3400

You are required to prepare a cost statement for the year ended 31st
Dec 04
 Solution:
Z Ltd
Cost Statement for the yr ended 31st Dec 2004
Particulars Rs. Rs.
Raw Materials Consumed:
Stock of Raw materials as on 1st Jan 04 48,000
(+) Materials Purchased 1,85,000
(+) Carriage Inward 7,150
(-) Stock of Raw Materials as on 31st Dec 04 62,800
Raw Materials Consumed 1,77,350
Productive Wages 1,26,000
Prime Cost 3,03,350

Add: Works/Factory Overheads

Work Office Salaries 6,500
Repairs to P/M 4,450
Rents, Rates, Taxes & Insurance etc- Factory 8,500
Depreciation on P/M 6,500
Gas & Water (Factory) 1,200
Manager’s Salary (3/4) 7,500
Works or Factory Overheads 34,650
Works Cost 3,38,000
Add: Office & Administrative Overheads
Administrative Office Salaries 12,600
Rents, Rates, Taxes, Insurance etc- Office 2,000
Depreciation on Office furniture 300
Director’s Fees 6,000
Gas & Water (office) 400
Manager’s salary (1/4) 2,500
General Expenses 3,400
Office & Administrative Overheads 27,200
Cost of Production/ Cost of Goods Sold 3,65,200
Add: Selling & Distribution Overheads
Carriage Outward 4,300
Traveling Expenses 2,100
Travelers Salary & Commission 7,700
Selling & distribution Overheads 14,100
Total Cost of Sales 3,79,300
Add: Profit (Balancing Figure) 81,700
Sales 4,61,000
 PROFORMA OF ESTIMATED COST SHEET

Total Per Unit Total Per Unit

Cost Cost
Direct Material XXX XXX XXX XXX
Direct Labour XXX XXX XXX XXX
Direct Wages XXX XXX XXX XXX
Prime Cost XXX XXX XXX XXX
Factory
Overheads XXX XXX XXX XXX

Works Cost XXX XXX XXX XXX

Office &
Administration
Overheads XXX XXX XXX XXX

Cost of
Production XXX XXX XXX XXX
Selling &
distribution
Overheads XXX XXX XXX XXX
Cost of Sales XXX XXX XXX XXX
Profit XXX XXX XXX XXX
Sales XXX XXX XXX
SOLVED EXAMPLE OF ESTIMATED COST SHEET
Swadeshi Electronics Ltd. furnishes you the following information for
the year ended 31st March 06

Production & sales 15000 units

Sales Rs. 1275000
Direct wages Rs. 270000
Direct materials Rs. 330000
Factory overheads Rs. 225000
Administrative overheads Rs.105000
Sales overheads Rs. 90000

On account of intense competition following changes are estimated in

the subsequent year:
1. Production and sales activity will be increased by one third
2. Material rate will be lowered by 25%. However there will be
increase in consumption by 20%
3. Direct wages cost would be reduced by 20% due to automation
4. Out of the above factory overheads rs. 45000 are fixed in nature.
The remaining factory expenses are variable in proportion to the
number of units produced
5. Total administrative expenses will be lowered by 40%
6. Sales overhead per unit would remain the same
7. Sales price per unit would be lowered by 20%

Prepare a statement of cost for both the yrs ending 31st March 06
and 31st March 07 showing maximum possible details of cost
 Solution:
Swadeshi Electronics Ltd
Cost Sheet for the yr ended 31st Mar 06 & 31st March 07
15000 20000
Total Per Unit Total Per Unit
Cost Cost
Direct Materials 330000 22 396000 19.8
Direct Wages 270000 18 288000 14.4

Prime Cost 600000 40 684000 34.2

Factory
Overheads 225000 15 285000 14.25

Works Cost 825000 55 969000 48.45

Administrative
Overheads 105000 07 63000 3.15

Cost of
Production 930000 62 1032000 51.6
Sales Overheads 90000 06 120000 06

Cost of Sales 1020000 68 1152000 57.6

Profit 255000 17 208000 10.4

Sales 1275000 85 1360000 68