ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Business and Employment»
  • Accounting

Preparation of Cost Sheet

Updated on February 14, 2013


Cost determination requires maintenance of a separate set of books to record all the transaction relating to costs. The object of costing is to ascertain the cost control and cost educations and to assist the management in framing out policies. The classification of accounts as Personal, Real and Nominal under Financial Accounts is not sufficient for achieving the above objects. The classification of accounts mainly depends on the needs of the organisation in small concern a simple classification by basic elements of cost may be sufficient. But in large concerns, activities are to be grouped into cost centres, and cost for each cost centre is to be ascertained. The nature of product and methods of production have a direct influence on the classification and accounting of costs

Cost Unit

"A cost unit is a unit of product, service or item in relation to which costs may be ascertained or expressed."

Considerable thought must be given to the selection of cost units. Since costing is measuring the unit measurement must be clearly defined and selected before the process of cost finding can be started. The forms of measurement used as cost units are number, length, area, volume, weight, time and value. The units should be natural to the nature of business operations. For example the coal is to be measured by the tonne, and cloth by metre.

In non-manufacturing operations, it is difficult to decide a suitable cost unit. A transport contractor may decide to relate his costs to weight carried e.g., per tonne. This is certainly a cost unit, but it is not a logical one since it does not consider the distance factor which influences cost to a great extent. A more appropriate and accurate unit would therefore be tonne- kilometres.

Cost Centre

The determination of a suitable cost centre as well as analysis of cost under cost centre is very helpful for periodical comparison and control of costs. The person in charge of a cost centre is held responsible for control of cost of his centre. This size and number of cost centres vary from concern to concern and largely depend on the amount of expenditure and management requirements of cost control.



Each element of cost is now examined in detail :-

1. Direct materials cost

Materials cost which can be identified with and allocated to cost centres or cost units. The following are the examples of direct materials

a) Materials, including component parts, specially purchased for a particular job,
order or process.

b) Materials passing from one operation or process to another.

c) Primary packing materials such as cartons, cardboard boxes etc.

The following terms are used in the same sense as direct material cost prime cost material; process material; production material, requisitioned material.

2. Direct wages

Wages (labour cost) which can be identified with and allocated to cost centres or cost units. Payment of the following groups of labour fall within the definition of direct wages.

a) Labour engaged in altering the condition, confirmation and composition of the

b) Inspectors, analysis, etc., specifically required for such production.

c) The wages of foremen, charge hands, shop clerks' the wages of internal transport personnel etc.,

The following terms are used in the same sense as direct wages direct labour; prime cost labour; process labour, cost; operating labour cost.

3. Direct expenses

Expenses which can be identified with and allocated to cost centres of cost units. The following group of expenses fall within the definition of direct expenses:

a) Cost of special designs, drawings or layout.

h) Hire of special tools or equipments for a particular job. c) Maintenance costs of such tools and equipments.

The following terms are used in the same sense as direct expenses.

4. Prime cost

Chargeable process expenses; productive expenses; prime cost expenses.

5. Production cost

The cost of the sequence operations which begins with supplying materials, labour and services and ends with primary packing of the product.

The following groups of indirect items fall within the category to production expenses

a) Indirect material

b) Indirect wages and

c) Indirect expenses

The following items are used in the same sense as Production overhead. Factory overhead, Works overhead, Factory on-cost. Works on-cost.

6. Administrative Overhead

Administrative overhead includes all indirect materials cost indirect wages and indirect expenses incurred in the direction, control and administration of an undertaking.

The following groups of indirect items fall within the definition of administration overhead.

a) Cost of indirect materials such as stationery.

b) Indirect wages such as office salaries including salaries of administrative directors, secretaries accountants etc.

c) Indirect expenses such as rent, rates and insurance of general offices; lighting,heating and cleaning of general offices; bank charges; depreciation and repairs of office buildings and equipments; legal charges, audit fees etc.


    0 of 8192 characters used
    Post Comment

    • profile image

      snehalkumawat 4 years ago

      So much help full. ...