The statement that is prepared by an enterprise at a particular period of time and that collects all the fundamentals of the cost associated with a product or a production job is referred to as the "cost sheet". The cost sheet aims to compile the margins that are earned through a product and which forms the basis of fixing prices of the equivalent product in the future.
What does a Cost Sheet Depict?
It depicts the cost per unit of a product and also the total cost. There are various elements of cost like production cost, factory cost, prime cost, cost of goods sold, and the total cost. It also reflects the percentage of every expense to the total cost. It also shows the inefficiency by comparing the cost of any two periods. Further, the cost sheet provides information to the management team that they can use in regulating the cost. Most importantly it calculates and gives a summary of the total cost of the product.
The Objective of Cost Sheet
The cost sheet is used for a different purpose. For instance, it helps in determining the selling price of any service or good. It determines the cost of the product and the service at each stage and also finds the total cost of the product Understanding the total cost the management team decides on adding the profit margin and that is how the selling price is decided. Another, the objective of a cost sheet is facilitating the managerial decision making. It means that the cost sheet helps the managers to formulate better decisions. It helps them in buying or producing a component and allows them to decide what price of goods will be suitable to quote in the tender.
Moreover, they get to decide whether to eliminate or keep the existing machines or to deduct pricing and improve the profit margins. Most importantly they get to decide the products and the services that are beneficial for the growth of their business. The cost sheet allows them to have a broad understanding of the services and products that are not capable of producing profits and should be discontinued from production.
Another fundamental area that cost sheets help is in the preparation of the budget. By using the current or the previous year's data, the budget can be obtained. The cost of the next financial year can also be anticipated with the help of the cost sheet and accordingly, the next year's fund can be arranged.
While preparing the cost sheet, it is important to understand the elements of cost. There are four elements of cost which are prime cost, factory cost, production cost, and total cost. The prime cost deals with direct material, wages, and expenses. It is, therefore, the material that is consumed, productive remunerations, and direct expenditures. The factory or the work cost signifies the additional cost to the prime cost in indirect labour, material, and expenses. It is also inclusive of incomplete units at the end of the period.
Now, at the end of the period, the administration and the office cost are added to the factory cost which results in the cost of the products sold or the cost of production. Finally when the production, selling and distribution cost overhead is added it results in total cost.
How to Prepare a Cost Sheet?
At first, it is important to understand that the prime cost is equivalent to direct material consumed besides the direct labour and direct expenses. Therefore to understand the cost of the direct material opening stock of raw material should be identified eliminating the closing stock of raw material and adding it with the cost of the material purchased.
Next, to understand the work cost factory cost and the prime cost should be added. It should also be added with the opening work in progress after deducting the close work in progress. In the third step, it is important to understand the production cost.
To understand that the work cost and office overheads and finished goods should be added. In the last step, the total cost should be evaluated. To get the total cost, selling and distribution overhead should be added with the cost of production.
With the help of the cost sheet, the management will be able to formulate better strategies. Moreover, they will also be able to decide which product and services should be eliminated from the company and which are the products and goods that are capable of giving them a better profit margin and thus help the organization to grow.