Management Accounting
Module 3: Cost Sheets
Module Objective: To familiarize students with the preparation & use of cost sheets under the
traditional absorption costing approach
A cost sheet is a summary statement that is used to present a breakup of the various costs incurred
by a business for its entire set of activities. Traditionally, cost sheets have been associated with
uniform costing, applicable where either a very small variety of products are produced, with
production on a uniform basis (typically, make-to-stock production systems). The traditional cost
sheet is also typically used in cases where businesses follow a cost-plus pricing approach. A
specimen cost sheet is given below.
A Sample Cost Sheet (Standardized Format)
Cost Sheet for the period ___________________________
Production _______________ Units ; Sales ________________ Units
Details Total Cost (Rs) Cost Per Unit (Rs)
Opening inventory of raw materials
Add Purchases of raw materials
Add Expenses on Purchases of raw materials
Less Closing inventory of raw materials
Cost of material consumed
Add Direct Wages
Add Direct Expenses
Prime Cost
Add Factory Overhead Expenses
Add Opening inventory of Work in Progress
Less Closing inventory of Work in Progress
Factory Cost (or Works Cost)
Add Administrative Overheads
Cost of Production
Add Opening inventory of finished goods
Less Closing inventory of finished goods
Cost of Goods Sold
Add Selling & Distribution Overheads
Cost of Sales
Net Operating Profit (or Loss)
SALES
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Management Accounting
A reason for terming this approach to preparing cost sheets as “absorption costing” is due to the
way fixed overheads are accounted for. Under this approach, the per-unit fixed overhead cost is taken to
be the pre-determined overhead absorption rate and the total cost computed accordingly.
Under/Over-absorbed overheads
In cost sheet preparation, overheads are charged to products using the budgeted overhead absorption
rates The formula that is used to arrive at under/over-absorbed overheads is given by Actual Overheads
– Absorbed Overheads. To quickly recap, this is how the system is used:
Actual > Absorbed Under-absorbed Interpretation: A lower amount of overheads
has been recorded in the cost sheet as
compared to the amount actually spent. In
order to reconcile the figure of operating
profit/loss as per cost sheet with the PBIT in
the financial statements, we need to have
recorded a higher amount of overheads in
the cost sheet. Hence, the amount of under-
absorbed overheads is to be added to the
cost of sales
Actual < Absorbed Over-absorbed Interpretation: A higher amount of
overheads has been recorded in the cost
sheet as compared to the amount actually
spent. In order to reconcile the figure of
operating profit/loss as per cost sheet with
the PBIT in the financial statements, we need
to have recorded a lower amount of
overheads in the cost sheet. Hence, the
amount of over-absorbed overheads is to be
subtracted from the cost of sales
Problem 3.1: Preparation of Cost Sheets
Reliable Packers Ltd. was formed on 1st April 2010 to take over the business of screen printing
from ABC Packaging Ltd. At the end of six months, the management decided to conduct a mid-
year review of the operations. The following is the profit & loss account of Reliable Packers Ltd
prepared by its accountants for this six-month period.
Profit & Loss A/c of Reliable Packers Ltd. for the six months ended 30 th September 2010
Items Amt. (Rs) Amt. (Rs)
Sales 450,000
Less: Expenses
Raw Materials Purchased 180,000
Direct Labor Cost 70,000
Indirect Labor Cost 15,000
Stores & Spares Consumed 10,000
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Management Accounting
Depreciation on Factory Equipment 30,000
Depreciation on Delivery Van 10,000
Insurance on Factory Premises 5,000
Salaries of Selling & Administration Personnel 40,000
Advertisement 50,000
Interest on Loans 15,000
Rent on Factory Premises 40,000
Rent for Corporate Head Office 10,000 475,000
Net Loss (25,000)
Additional Information:
1. 80% of the Stores & Spares consumption is for factory operations while the rest is for
administrative activities. 40% of Salaries of Selling & Administration Personnel are for
administrative personnel.
2. The following is the inventory position of the company.
Item 1st April* 30th September
Raw Materials 5,000 10,000
Work-in-Progress Nil 2,500
Finished Goods 10,000 5,000
* - These values are for inventory components taken over from ABC Packaging Ltd.
Looking at the figure of loss, the CEO of Reliable Packers Ltd. asks you to prepare a cost
statement that will help him weigh the further steps to improve profitability of the business.
Problem 3.2 : Cost Sheet Preparation – Once again
The following particulars are extracted from the books of a company relating to commodity “A” for the
half year ended 30th June 1993
Particulars Amount (Rs.)
Purchase of Raw Materials 132000
Direct Wages 110000
Rent, Rates, Insurance, and Works Overhead 44000
Carriage Inward 1584
Stock on 1-1-1993
Raw Materials 22000
Finished Goods (1600 tonnes) 17000
Work-in-progress 5280
Stock on 30-6-1993
Raw Materials 24464
Finished Goods (3200 tonnes) 35200
Work-in-progress 17600
Factory Supervision 8800
Sales – Finished Goods 330000
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Management Accounting
Selling & Advertising expenses allocation rate was 75 paise per tonne sold. 25600 tonnes of the
commodity were sold during these 6 months. Actual S&D Overheads amounted to Rupees 18,000. Actual
Factory Overheads amounted to Rupees 55,000.
You are required to prepare the cost sheet for the above data.
Problem 3.3: Cost Sheet Preparation with missing figures
Problem 2-27, page 81, GNB
Selected account balances for the year ended December 31 are provided below for Superior Company:
Selling and administrative salaries Rs110,000
Insurance, factory Rs8,000
Utilities, factory Rs45,000
Purchases of raw materials Rs290,000
Indirect labor Rs60,000
Direct labor ?
Advertising expense Rs80,000
Cleaning supplies, factory Rs7,000
Sales commissions Rs50,000
Rent, factory building Rs120,000
Maintenance, factory Rs30,000
Inventory balances at the beginning and end of the year were as follows:
Beginning End of
of the Year the Year
Raw materials Rs40,000 Rs10,000
Work in process ? Rs35,000
Finished goods Rs50,000 ?
The total manufacturing costs for the year were Rs683,000; the goods available for sale totaled
Rs740,000; and the cost of goods sold totaled Rs660,000.
Required:
1. Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the
company’s income statement for the year.
2. Assume that the dollar amounts given above are for the equivalent of 40,000 units produced during
the year. Compute the average cost per unit for direct materials used and the average cost per unit for
rent on the factory building.
3. Assume that in the following year the company expects to produce 50,000 units. What average cost
per unit and total cost would you expect to be incurred for direct materials? For rent on the factory
building? (Assume that direct materials is a variable cost and that rent is a fixed cost.)
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Management Accounting
4. As the manager in charge of production costs, explain to the president the reason for any difference
in average cost per unit between (2) and (3) above.
Problem 3.4: Cost Sheet & Order Pricing
You are an accountant at India Structurals Ltd. The contract department seeks your advice about the
quotation to be submitted in a tender for 1000 tons of structural material. The following figures are
available to you for this purpose:
Particulars Amount (Rs.)
Output of structural material per year (tons) 20,000
Yearly consumption of raw materials 2,00,00,000
Yearly wage bill 2,50,00,000
Yearly depreciation of plant 50,00,000
Annual dividend to shareholders 30,00,000
Income tax (annual) 50,00,000
Salaries of supervisory staff for one year 50,00,000
Remuneration & perquisites of Managing Director for the year 1,00,000
The company requires a 20% profit margin on sales. You are required to suggest the appropriate rate to
be quoted.
Mini Case 3.5: Cost determination with incomplete information
Cool-Wind Ltd. manufactures fans that are sold at Rs. 400 per piece. The cost of sale comprises 40%
materials, 30% wages, and 30% overheads.
An increase in material price by 25% and the wage rate by 10% is expected in the forthcoming year as a
result of which profit per unit would decline by 39% from the current levels.
With the above information, you are required to
a) Prepare a statement showing current and future cost and profit if the existing selling price is to be
maintained
b) Determine what the future selling price should be if the current rate of profit is to be maintained.
Mini Case 3.6: Cost sheet preparation with incomplete information
Ron Williams recently took over as the controller of Johnson Brothers Manufacturing. Last month, the
previous controller left the company with little notice and left the accounting records in disarray. Ron
needs the ending inventory balances to report first quarter numbers.
For the previous month (March 2011) Ron was able to piece together the following information:
Direct materials purchased $ 240,000
Work-in-process inventory, 3/1/2011 $ 70,000
Direct materials inventory, 3/1/2011 $ 25,000
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Management Accounting
Finished goods inventory, 3/1/2011 $ 320,000
Conversion Costs $ 660,000
Total manufacturing costs added during the period $ 840,000
Cost of goods manufactured 4 times direct materials used
Gross margin as a percentage of revenues 20%
Revenues $1,037,500
Calculate the cost of:
1. Finished goods inventory, 3/31/2011
2. Work-in-process inventory, 3/31/2011
3. Direct materials inventory, 3/31/2011
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Management Accounting
Practice Problems
Problem 1
Swift Company was organized on March 1 of the current year. After five months of start-up losses,
management had expected to earn a profit during August. Management was disappointed, however, when
the income statement for August also showed a loss. August’s income statement follows:
SWIFT COMPANY
Income Statement
For the Month Ended August 31
Sales………………. Rs450,000
Less operating expenses:
Indirect labor cost Rs12,000
Utilities 15,000
Direct labor cost 70,000
Depreciation, factory equipment 21,000
Raw materials purchased 165,000
Depreciation, sales equipment 18,000
Insurance 4,000
Rent on facilities 50,000
Selling and administrative salaries 32,000
Advertising 75,000
462,000
Net operating loss (Rs12,000)
After seeing the Rs12,000 loss for August, Swift’s president stated, “I was sure we’d be profitable within
six months, but our six months are up and this loss for August is even worse than July’s. I think it’s time
to start looking for someone to buy out the company’s assets – if we don’t, within a few months there
won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just
limp along with Sam for the time being.”
The company’s controller resigned a month ago. Sam, a new assistant in the controller’s office,
prepared the income statement above. Sam has had little experience in manufacturing operations.
Additional information about the company follows:
a. Some 60% of the utilities cost and 75% of the insurance apply to factory operations. The remaining
amounts apply to selling and administrative activities.
b. Inventory balances at the beginning and end of August were:
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Management Accounting
1-Aug 31-Aug
Raw materials Rs8,000 Rs13,000
Work in process Rs16,000 Rs21,000
Finished goods Rs40,000 Rs60,000
c. Only 80% of the rent on facilities applies to factory operations; the remainder applies to selling
and administrative activities.
The president has asked you to check over the income statement and make a recommendation as
to whether the company should look for a buyer for its assets.
Required:
1. As one step in gathering data for a recommendation to the president, prepare, a schedule of cost
of goods manufactured for August.
2. As a second step, prepare a new income statement for August.
3. Based on your statements prepared in (1) and (2) above, would you recommend that the company
look for a buyer?
Problem 2
Visic Corporation, a manufacturing company, produces a single product. The following information has
been taken from the company’s production, sales, and cost records for the just completed year.
Production in units 29,000
Sales in units ?
Ending finished goods inventory in units ?
Sales in dollars Rs1,300,000
Costs:
Advertising Rs105,000
Entertainment and travel Rs40,000
Direct labor Rs90,000
Indirect labor Rs85,000
Raw materials purchased Rs480,000
Building rent (production uses 80% of the
spaces; administrative and sales offices use the
rest) Rs40,000
Utilities, factory Rs108,000
Royalty paid for use of production patent,
Rs1.50 per unit produced ?
Maintenance, factory Rs9,000
Rent for special production equipment,
Rs7,000 per year plus Rs0.30 per unit produced ?
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Management Accounting
Selling and administrative salaries Rs210,000
Other factory overhead costs Rs6,800
Other selling and administrative expenses Rs17,000
Beginning of End of
the Year the Year
Inventories:
Raw materials Rs20,000 Rs30,000
Work in process Rs50,000 Rs40,000
Finished goods Rs0 ?
The finished goods inventory is being carried at the average unit production cost for the year.
The selling price of the product is Rs50 per unit.
Required:
1. Prepare a schedule of cost of goods manufactured for the year.
2. Compute the following:
a. The number of units in the finished goods inventory at the end of the year.
b. The cost of the units in the finished goods inventory at the end of the year.
3. Prepare an income statement for the year.
Problem 3-23
High Desert Pottery works makes a variety of pottery products that it sells to retailers such as Home
Depot. The company uses a job-order costing system in which predetermined overhead rates are used to
apply manufacturing overhead cost to jobs. The predetermined overhead rate in the Molding Department
is based on machine-hours, and the rate in the Painting Department is based on direct labor cost. At the
beginning of the year, the company’s management made the following estimates:
Department
Molding Painting
Direct labor-hours 12,000 60,000
Machine-hours 70,000 8,000
Direct materials cost Rs510,000 Rs650,000
Direct labor cost Rs 130,000 Rs 420,000
Manufacturing overhead cost Rs602,000 Rs735,000
Job 205 was started on August 1 and completed on August 10. The company’s cost records show
the following information concerning the job:
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Management Accounting
Department
Molding Painting
Direct labor-hours 30 85
Machine-hours 110 20
Materials placed into
production Rs470 Rs332
Direct labor cost Rs290 Rs680
Required:
1. Compute the predetermined overhead rate used during the year in the Molding Department.
Compute the rate used in the Painting Department.
2. Compute the total overhead cost applied to Job 205.
3. What would be the total cost recorded for Job 205? If the job contained 50units, what would be
the unit product cost?
4. At the end of the year, the records of High Desert Pottery works revealed the following actual cost
and operating data for all jobs worked on during the year:
Department
Molding Painting
Direct labor-hours 10,000 62,000
Machine-hours 65,000 9,000
Direct materials cost Rs430,000 Rs680,000
Direct labor cost Rs108,000 Rs436,000
Manufacturing overhead cost Rs570,000 Rs750,000
What was the amount of under or over-applied overhead in each department at the end of the year?
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