How to Calculate the Cost of Production? | Cost Accounting

Following are the methods used to find out the cost of production: 1. Statement of Cost 2. Cost Sheet 3. Tender Statement  4. Production Account.

Method # 1. Statement of Cost:

Statement of cost is a tabulated statement which shows the production cost of fixed quantity of a product, which is related to the production in a fixed time. Under this method, cost percent of every step of expenditure is not ascertained. Under this method total cost of production is divided by the number of units produced to find out cost per unit.

Specimen of statement of cost on the basis of the nature of the questions, is given as under:

1. When Opening and Closing Balance of Work-in-Progress and Opening and Closing Balance of Finished Goods are Not Given:

Items Excluded From Costs:

The following items are of financial nature and thus not included while preparing statement of cost or cost sheet:

(1) Cash Discount

(2) Interest paid and received

(3) Transfer to Reserves

(4) Donations

(5) Dividend paid and received

(6) Income-tax paid

(7) Profit or Loss on Sale of Fixed Assets

(8) Damages payable at Law

(9) Provision for Taxation

(10) Provision for Doubtful Debts

(11) Goodwill Written off

(12) Preliminary Expenses Written off

(13) Wealth Tax

(14) Cash Discount received

(15) Discount on Issue of Shares or Debentures

(16) Losses on Investments

(17) Cost of Accumulating Capital

(18) Transfer Fee (Cr.)

(19) Interest received on Bank Deposit, and

(20) Loss due to Obsolescence of Machine, etc.

2. When Opening and Closing Balances of WJ.P. and Opening and Closing Balances of Finished Goods are Given and Profit on Goods Sold Along-With Net Profit Has to be Calculated:

Method # 2. Cost Sheet:

Cost Sheet is a statement, prepared at a given interval of time say weekly, fortnightly, monthly, quarterly, half-yearly or annually, showing the various elements of cost of a product produced, or service rendered or job done during the period in total as well as per unit of output, in analytical, detailed and logical form. A cost sheet may also contain the details of the various elements of costs of the immediate preceding period.

Sometimes, it may contain even the pre-determined standard costs of the various elements. The details of costs of the immediate preceding period and the pre-determined standard costs facilitate comparison and help in ascertaining inefficiencies and wastages and in taking up remedial steps.

A typical cost sheet provides information only about the various elements of cost making up the cost of production. But, in practice, a cost sheet may contain information not only about the various elements of cost making up the cost of production, but also the cost of goods sold, selling and distribution expenses, sales and profit or loss made during the period.

Such a cost sheet is called and extended cost sheet or production statement or statement of cost and profit. The extended cost sheet is prepared in two parts. The first part shows the various elements of cost making up the cost of production. The second part shows the cost of goods sold, selling and distribution expenses, sales and profit or loss.

A cost sheet is only a memorandum statement and not an account. It does not form part of the double entry system.

Cost sheet has been defined by different scholars as under:

1. According to J. R. Batliboi, “A cost sheet is a tabulated statement prepared usually to indicate the detailed cost of the total output or production for a given period. It does not form part of the Double Entry Cost Accounts. It is usually provided with additional columns to enable comparison to be made of the current cost with those of the immediate preceding period and with the corresponding period of the previous year.”

2. According to Walter W. Bigg, “The expenditure which has been incurred upon production for a period is extracted from the financial books and the stores records and set out in a memorandum statement. If this statement is confined to do the disclosure of the cost of the units produced during the period, it is termed as cost sheet.”

From the above definitions, the following characteristics of cost sheet come up:

(1) It is such type of statement which is presented in the form of table.

(2) It shows the total cost and its different components for a certain period of time.

(3) Cost per unit is also known by cost sheet.

(4) It shows the contribution of different items in cost per unit.

(5) Stock of finished goods and sale and profit are not shown under it.

(6) For the purpose of comparison data (figures) for previous may also be shown in cost sheet.

Advantages or Purposes of Cost Sheet:

A cost sheet serves many useful purposes.

They are:

(1) It reveals the cost of total output and the cost per unit for the period.

(2) It discloses the components of the total cost.

(3) It reveals the percentage of each item of cost to the total cost. This information is very useful for comparison between the costs of different periods and between costs of different firms within the same industry.

(4) Selling price can be fixed more accurately on the basis of the cost data provided by the cost sheet.

(5) Selling prices can be regulated more easily and accurately on the basis of the cost data provided by the cost sheets prepared regularly at shorter intervals.

(6) Quotation prices can be fixed more accurately on the basis of data provided by the cost sheet.

(7) The cost data provided by the cost sheet helps the management in the formulation of wise production policies.

(8) By cost sheet, cost control is exercised.

(9) Wastages can be dropped by comparing it from standard cost.

(10) Consumers can be provided cheap and quality products with the help of cost sheet.

(11) It increases the income of the producers.

(12) In times of competition, expenses can be minimised with the help of cost sheet.

(13) Business inefficiencies can be removed by using cost sheet.

(14) Cost sheet facilitates the comparison of current cost with the costs of previous periods or with the pre-determined standard costs, and such comparison will enable the management to ascertain the variations, inefficiencies or wastages, if any, and take remedial measures to remove the variations or inefficiencies and control costs.

Form of Cost Sheet:

A Cost Sheet is prepared as follows:

Points to be Considered While Preparing Cost Sheet:

While preparing cost sheet the following points must be taken into consideration:

1. Heading:

While preparing cost sheet, there must be given a heading. Besides this, the period for which it is prepared should also be given.

2. Number of Units or Weight:

Just below the heading number of commodities produced or weight should also be mentioned.

3. Columns:

Although, no standard columns have been fixed for cost sheet, but, generally the following columns are used in the sequence given below:

(i) First column for particulars,

(ii) Second columns for cost-per unit,

(iii) Third column for total cost.

The sequence of column- (ii) and (iii) can be inter-changed. It varies man to man and no standard has been fixed for their sequence.

4. Presentation of Expenses:

Under cost sheet, different expenses are shown in the same way as in the case of statement of cost explained under Specimen No. 1.

Difference between Statement of Cost and Cost Sheet:

Following are the main differences between statement of cost and cost sheet:

i. Statement of cost shows only total cost of production, whereas under cost sheet total output, total cost and cost per unit of each element is shown.

ii. When volume of production is not given, then statement of cost is prepared. On the other hand, cost sheet is prepared when volume of production is given.

iii. With the help of statement of cost, comparative study of the costs of two periods or two products is not possible, where as it is possible only with the help of cost sheet.

iv. In statement of cost percentage of various elements of cost cannot be shown comprehensively, where as it is possible in case of cost sheet.

Method # 3. Tender Statement:

Quite often the management has to quote prices of its products in advance or has to submit tenders for goods to be supplied. For this purpose tender statement has to be prepared to show the estimated cost of products to be manufactured.

In this statement, cost of direct materials, direct wages and various types of overheads are pre-determined on the basis of past costs after taking into account the project conditions and also the anticipated changes in the future price level overheads are absorbed on the basis of suitable method of absorption like percentage of direct materials or wages or machine hour rate, etc.

Method # 4. Production Account:

When information shown in a cost sheet is presented in the form of a T-shape account, it is known as production account. In this account, debit side shows the various items of cost while credit side shows the sales of finished goods. Opening stock is written in the debit side while closing stock is written on the credit side.

Alternatively, closing stock may be shown as a deduction from the items in debit side. In this way this account shows the total cost. The balance in this account shows profit or loss as the case may be.