Cost Sheet and Preparation of Cost Statements
What this domain tests
A cost sheet states cost in the standard sequence for a period, and often per unit. Questions supply a list of expenses and stocks and ask for prime cost, works cost, cost of production, cost of goods sold, cost of sales, profit and sales.
Core rules
- Direct material consumed = opening material + purchases + carriage inward − purchase returns − closing material.
- Prime cost = direct material consumed + direct wages + direct (chargeable) expenses.
- Works cost = prime cost + factory overheads + opening work-in-progress − closing work-in-progress.
- Cost of production = works cost + administration overheads.
- Cost of goods sold = cost of production + opening finished goods − closing finished goods.
- Cost of sales = cost of goods sold + selling and distribution overheads; sales − cost of sales = profit.
- Show a per-unit column whenever output is given, and state the period covered.
Worked example
Opening material ₹10,000, purchases ₹90,000, carriage inward ₹2,000, closing material ₹12,000 → material consumed ₹90,000. Direct wages ₹40,000 → prime cost ₹1,30,000. Factory overheads ₹30,000 → works cost ₹1,60,000. Administration ₹15,000 → cost of production ₹1,75,000. Opening finished goods ₹5,000 and closing ₹8,000 → cost of goods sold ₹1,72,000. Selling overheads ₹8,000 → cost of sales ₹1,80,000. Sales ₹2,00,000 → profit ₹20,000, that is 10% of sales.
Traps
- Adding closing finished goods instead of deducting them, or omitting opening finished stock entirely.
- Putting carriage outward in works cost - it is a distribution overhead.
- Ignoring the work-in-progress adjustment, which belongs in works cost only.
- Treating income tax, discount on issue of shares or a donation as an element of cost.