Category: Management Notes

Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of cost data to management for measuring efficiency and for cost control and cost reduction, ascertaining the profit of each activity, assisting management in decision making and determination of break-even point.

The aim is to know the methods by which expenditure on materials, wages and overheads is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day.

Following are the main objectives of cost accounting:

1. To ascertain the cost per unit of the different products manufactured by a business concern;
2. To provide a correct analysis of cost both by process or operations and by different elements of cost;
3. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage;
4. To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;
5. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised;
6. To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimise the capital locked up in these stocks;
7. To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads;
8. To advise management on future expansion policies and proposed capital projects;
9. To present and interpret data for management planning, evaluation of performance and control;

• To help in the preparation of budgets and implementation of budgetary control;
• To organise an effective information system so that different levels of management may get the required information at the right time in right form for carrying out their individual responsibilities in an efficient manner;
• To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings;
• To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc.;
• To help in supervising the working of punched card accounting or data processing through computers;
• To organise the internal audit system to ensure effective working of different departments;
• .To organise cost reduction programmes with the help of different departmental managers;
• To provide specialised services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management; and
• To find out costing profit or loss by identifying with revenues the costs of those products or services by selling which the revenues have resulted.

The advantages of cost accounting are:

Disclosure of profitable and unprofitable activities

Since cost accounting minutely calculates the cost, selling price and profitability of product, segregation of profitable or unprofitable items or activities becomes easy.

Guidance for future production policies

On the basis of data provided by costing department about the cost of various processes and activities as well as profit on it, it helps to plan the future.

Periodical determination of profit and losses

Cost accounting helps us to determine the periodical profit and loss of a product.

To find out exact cause of decrease or increase in profit

With the help of cost accounting, any organization can determine the exact cause of decrease or increase in profit that may be due to higher cost of product, lower selling price or may be due to unproductive activity or unused capacity.

Control over material and supplies

Cost accounting teaches us to account for the cost of material and supplies according to department, process, units of production, or services that provide us a control over material and supplies.

Relative efficiency of different workers

With the help of cost accounting, we may introduce suitable plan for wages, incentives, and rewards for workers and employees of an organization.

Reliable comparison

Cost accounting provides us reliable comparison of products and services within and outside an organization with the products and services available in the market. It also helps to achieve the lowest cost level of product with highest efficiency level of operations.

Helpful to government

It helps the government in planning and policy making about import, export, industry and taxation. It is helpful in assessment of excise, service tax and income tax, etc. It provides readymade data to government in price fixing, price control, tariff protection, etc.

Helpful to consumers

Reduction of price due to reduction in cost passes to customer ultimately. Cost accounting builds confidence in customers about fairness of price.

Classification and subdivision of cost

Cost accounting helps to classify the cost according to department, process, product, activity, and service against financial accounting which give just consolidate net profit or loss figure of any organization without any classification or sub-division of cost.

To find out adequate selling price

In tough marketing conditions or in slump period, the costing helps to determine selling price of the product at the optimum level, neither too high nor too low.

Proper investment in inventory

Shifting of dead stock items or slow moving items into fast moving items may help company to invest in more proper and profitable inventory. It also helps us to maintain inventory at the most optimum level in terms of investments as well as variety of the stock.

Correct valuation of inventory

Cost accounting is an accurate and adequate valuation technique that helps an organization in valuation of inventory in more reliable and exact way. On the other hand, valuation of inventory merely depends on physical stock taking and valuation thereof, which is not a proper and scientific method to follow.

Decision on manufacturing or purchasing from outside

Costing data helps management to decide whether in-house production of any product will be profitable, or it is feasible to purchase the product from outside. In turn, it is helpful for management to avoid any heavy loss due to wrong decision.

Reliable check on accounting

Cost accounting is more reliable and accurate system of accounting. It is helpful to check results of financial accounting with the help of periodic reconciliation of cost accounts with financial accounts.

Budgeting

In cost accounting, various budgets are prepared and these budgets are very important tools of costing. Budgets show the cost, revenue, profit, production capacity, and efficiency of plant and machinery, as well as the efficiency of workers. Since the budget is planned in scientific and systemic way, it helps to keep a positive check over misdirecting the activities of an organization.

Disadvantages

1. Lack Of Fixed Principles

Generally, cost accounting system is practiced on presumed notions. It does not follow fixed accounting principles. So, there is a lack of uniformity in this system.

2. Costly System

This is another major drawback of cost accounting. There is a need of highly skilled and qualified manpower and resources to maintain cost accounting system in the organization. A lot of clerical works and various procedure make cost accounting more expensive.

3. Complex System

It is very complicated system of accounting. It requires various formulas to record cost related data. It needs specific knowledge to prepare different reports. Due to numerous steps and rules, it is considered as complex system of accounting.

4. Not Suitable for Small Business

Small business firms with less number of production or transactions do not prefer cost accounting because of higher cost and complexity. 

5. Ignores Financial Items

Actual profit or loss of the business cannot be ascertained by cost accounting because it ignores income and expenses of financial nature.

6. Lack Of Accuracy

Cost accounting avoids financial character expenses at the time of cost calculation. It does not follow double entry system to check the accuracy. So, result obtained from cost accounting may lack accuracy.

7. Not Helpful In Decision Making

Only cost related past data and information can be obtained from cost accounting. So, top level management cannot be benefited from cost accounting to make future decision and plans. Delay in data and information may also hamper decision making process.

8. Dependent

Cost accounting cannot be installed and maintained without other accounting system. It is totally dependent with other branches of accounting, especially with financial accounting.

1. Payroll Accounting:

It is concerned with the maintenance of records for the amounts due to the employees like salaries, wages, allowances, contributions to provident fund and E.S.I, etc. and the deduction to be made from the employees’ earnings. Payroll accounting requires the information relating to employee’s attendance, leaves, rates of pay, amounts to be deducted etc.

2. Labour Cost Accounting:

It is concerned with identifying the amount of labour cost to be charged to individual jobs and overhead accounts. For this purpose, information relating to the time spent on each job or process or number of units produced is obtained from the job cards, piece work tickets etc. The idle time analysis is also necessary for labour cost accounting.

The main objective of it is to record the time spent by all workers on each activity on a separate job card or time sheet and then apply the appropriate hourly rate. The labour costs are then charged to each of these activities. The job cards, time sheets, idle time cards are the important documents for analyzing production labour costs to various jobs and overhead accounts.

3. Time Keeping:

Time keeping means to note the attendance of workers for wage payments. It is the marking of attendance of a worker when he comes and leaves the factory. This record is generally kept at the factory gate and the workers coming in and going out have to record their time in it. Based on their attendance in the factory, they receive the wages.

The prime objectives of time keeping are as follows:

(a) Preparation of Payroll:

The wage bills of the organization are prepared by the payroll department on the basis of information given by the time keeping department.

(b) Computation of Cost:

The Costing department will compute the labour cost of different jobs, departments, cost centres etc. basing on the data of time spent provided by the time keeping department.

The time record will give us an idea about the total time for which the workers were present in the factory and for which they are paid. There are various methods of time keeping – hand written record, disc or token system, punch card system etc.

With the advancement of technology, the computers are also being used for time recording and analysis. The person who looks after time keeping is called ‘time keeper’ and his place of work is called ‘time office’. The time records are the basic data used for calculation of salaries and wages, overtime premium etc.

4. Time Booking:

It is necessary to account for labour cost against each job, department, process, contract, cost centre etc. for which time booking records are kept to ascertain the labour time spent. Time booking means to know how much time is effectively spent by the worker on each job or in each department or on a process or on each contract etc. It is the recording of time spent within the working day upon different jobs.

It is the keeping of record of particulars of work done, or time spent on each job, process, operation etc. It is used to ascertain the labour time spent on each job, analysis of idle time, labour cost of various jobs and products. The time booking record is kept in the form of time cards for each worker, recording therein the actual time spent by him on the work.

The objectives of time booking are as follows:

(a) To ascertain the labour time spent on the job and the idle labour hours.

(b) To ascertain labour cost of various jobs and products.

(c) To calculate the amount of wages and bonus payable under the wage incentive scheme.

(d) To compute and determine overhead rates and absorption of overheads under the labour and machine hour methods.

(e) To evaluate the performance of labour by comparing actual time booked with standard time.

Bonus and Labour incentives

Incentive Scheme: Type # 1. Halsey Premium Plan:

This plan was introduced by F. A. Halsey, an American engineer, in 1891. It recognises individual efficiency and pays bonus on the basis of lime saved. Under the method a worker is given wages at the time rate for the time he actually worked and also paid a bonus if he can complete the work in less than the time allotted to do the work.

The bonus is paid at a fixed percentage of the time saved, usually 50%, (though the percentage varies from 30% to 70% of time saved). The remaining 50% of the time saved is shared by the employer.

Thus,

Total Earnings = T.T. × H.R. + 50% (T.S. × H.R.)

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

The main advantages of the method are:

(i) The method is simple to operate and easy to understand.

(ii) The slow workers are not penalised, as time wage is guaranteed.

(iii) It provides incentives to more efficient workers.

(iv) Worker’s efficiency means reduction in cost per unit.

(v) The benefit of time saved is shared between employer and employee equally.

The main disadvantages of the method are:

(i) Many employees organisations do not like to share the benefit of time saved equally.

(ii) Attraction of bonus reduces the quality of work.

(iii) Reduction of quality means chances of more wastage, spoilage, defective and break down etc. and more supervision cost.

(iv) It is not so much attractive as in the case of piece rate payments.

(v) It offers less incentive to the workers as compared to other incentive plans.

(vi) If the time rate is not fixed properly, this may lead to a higher bonus.

Incentive Scheme: Type # 2. Halsey-Weir Premium Scheme:

The scheme was introduced by Weir Ltd. of Glasgow in about 1900. It is similar to Halsey Scheme except that under this scheme the employee gets 33⅓% (often 30%) of the time saved as bonus and the remaining 66⅔% goes to the employer.

Thus:

Total Earnings = T.T. × H.R. + 33⅓% (T.S. × H.R.)

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

Incentive Scheme: Type # 3. Rowan Plan:

Grames Rowan first introduced this plan in Glasgow in 1898. Under this scheme also the worker gets his guaranteed time wages for the hours of his actual work, like Halsey Scheme. But here the premium is calculated by a different method.

If the worker can complete the job in less than the time allowed, his bonus becomes equal to his time wages for that proportion of the time taken as the time saved bears to the time allowed.

Thus, the bonus is calculated as:

and, Total Earnings = T.T × H.R. + (T.T. × H.R.) × T.S./T.A.

where, T.T. = Time Taken

H.R. = Hourly Rate

T.S. = Time Saved

T.A. = Time Allowed

The following are the main advantages of the scheme:

(i) It provides incentives to learners and slow workers.

(ii) Since the premium is proportionate to the time saved, the employers get protection if the rate is not fixed properly.

(iii) From the point of view of employer the Rowan Scheme is safer than the Halsey Scheme.

(iv) Up to 50% of the time saved, bonus under the scheme is higher than that under Halsey Scheme.

(v) As the bonus increases at a decreasing rate; the employees do not rush for rapid completion of job, hence lesser chances of wastage etc.

(vi) Due to higher output, fixed overhead per unit will be lower.

The main disadvantages are:

(i) Method is complicated.

(ii) At the level of higher production, incentive is low.

(iii) Employees are not willing to share their time savings with their employers.

Comparison between Halsey and Rowan Scheme:

(1) Up to 50% of time saved, the premium will be same under the two schemes.

(2) Under Rowan Scheme bonus rises faster than Halsey Scheme until the job performed in half than the standard time.

(3) But when the time taken to perform the work is less than half of the standard time, premium and total earnings under the Halsey Scheme are both greater than those under Rowan Scheme.

(4) On the other hand, when the time taken to perform the work is more than half of the standard time, bonus and total earning under the Rowan Scheme are both greater than those under the Halsey Scheme.

(5) The Halsey Scheme provides more incentive to speed up production but there is an automatic check under the Rowan Scheme after certain stage.

(6) Halsey Scheme proves to be costlier if more than half the time is saved, while Rowan Scheme is costlier if less than half the standard time is saved.

Incentive Scheme: Type # 4. Taylor’s Differential Piece Rate System:

This system was first introduced by F. W. Taylor, the Father of Scientific Management. This system provides no minimum guaranteed time wages.

But under the system two piece rates are fixed:

(a) A low piece rate for output below the standard is paid to the workers, and

(b) A higher rate is paid to the workers who produce equal or more than the standard. Thus, this system penalises the inefficient workers and rewards the efficient workers.

The efficiency of a worker may be determined as a percentage, either:

(i) Of the time allowed for a job to the actual time taken, or

(ii) Of actual output to the standard output, within a specified time.

Incentive Scheme: Type # 5. Merrick Differential Piece Rate Plan:

This is a slight modification of Taylor’s System and uses three rates instead of two. Under this system also day wages are not guaranteed.

The three piece rates are:

Efficiency – Piece rate applicable

Up to 83% – Normal rate

Up to 100% – 10% above normal rate

Above 100% – 20% above normal rate

The main feature of this system is that it does not penalise the workers who produce below the standard output up to 83% and the earnings increase with increased efficiency at two stages.

Incentive Scheme: Type # 6. Gantt Task and Bonus Plan:

The plan is a good combination of time-work and piecework. Under the scheme the day wages of the worker are guaranteed.

The main features of the bonus scheme are:

Output – Bonus

At 100% – 20% on the total output

Above 100% – 20% of the wages of the standard time, or High piece rate on the worker’s whole output.

This scheme protects and encourages the less efficient workers who cannot produce the standard output. It offers a good incentive to the efficient workers.

Incentive Scheme: Type # 7. Emerson’s Efficiency Plan:

This scheme is also a combination of time wage, piece rate wage and bonus plans. Under this method a standard time is set for each job, or task or volume of output is fixed as the standard. The standard efficiency is set at 66⅔ or 67%. For efficiency up to 67% the worker gets his day wage only.

If he crosses the standard task, he becomes entitled to bonus and the rate of bonus increases with the increase in efficiency. At 100% level of efficiency, the bonus becomes 20%. Again, if the efficiency exceeds 100%, bonus increases by 1% for every 1% increase of efficiency above 100%.

Incentive Scheme: Type # 8. Group Bonus Plans:

The incentive schemes explained so far are applicable to individual workers only. But, sometimes it becomes necessary to introduce Group Bonus Scheme. Under the scheme bonus is paid to the group as a whole, depending upon the performance of the group and the amount of bonus is shared by themselves equally or at an agreed proportion.

The group bonus is suitable in the following circumstances:

(a) When it is very difficult to measure the performance of individual worker, but the production through collective efforts of a group of workers can be measured.

(b) The nature of the work requires collective effort.

(c) Where it is desirable to develop a team spirit.

(d) Where both the direct and indirect workers are to be rewarded.

(e) When bonus scheme cannot be operated successfully for individual workers.

However, before introducing a group bonus scheme, following points must be considered very carefully:

(i) Well combination among the group.

(ii) The size of the group should be economic.

(iii) The group should be homogeneous.

(iv) The production of the group should be within its control.

Thus, a group bonus scheme encourages team spirit, reduces wastage, assures cooperation, lessens supervisory work and reduces overall costs.

Illustration 1:

Time allowed for a job = 5 hrs

Time taken to complete the job = 4 hrs

Rate Per hour = Rs. 1

Calculate the total earnings of a worker under the Halsey Premium Scheme.

Solution:

Total Earnings = Hours worked × Rate per hour + 50/100 × (time saved × hourly rate)

= Rs. 4 × 1 + (50/100 × 1) × 1

= Rs. (4 + 1/2) = Rs. 4.50

Illustration 2:

Time allowed for a work = 10 hrs

Time taken to complete the job = 8 hrs

Rate per hour = Rs. 2

Calculate the total earnings of a worker under the Halsey Premium Scheme.

Solution:

Total Earnings = Time Taken × Hourly Rate + 33⅓ (T.S. × H.R.)

Where T.S. = Time Saved, H.R. = Hourly Rate

Total Earnings = 8 × Rs. 2 + 33⅓/100 × 2 × Rs. 2

= Rs. 16 + Rs. ⅓ × 4 = Rs. 16 + Rs. 1.33 = Rs. 17.33

Illustration 3:

Standard time is 20 hrs, Time taken is 16 hrs, Hourly Rate is Re. 0.50

Find out total earnings under Rowan Plan.

Solution:

Total Earnings = Time Taken × Hourly Rate + (Time Taken x Hourly Rate) × Time Saved/Time Taken

Time Saved = Time Allowed – Time Taken

= (20 – 16) hrs. = 4 hrs

.^.. Total Earnings = 16 × Re. 0.50 + (Re. 0.50 × 16) × 4 × Rs. 0.50/20

= Rs. 8 + Rs. 8 × 2/20 = Rs. (8 + 0.80)

= Rs. 8.80

A factory works 8 hours a day. The standard output is 10 units per hour and normal rate is Rs. 5 per hour. The factory has introduced the following differentials in the matter of wage payment:

80% of piece rate when below standard.

120% of piece rate when at or above standard.

Find out piece rate at below and above standard.

Solution:

Normal piece rate = Rs. 5/10 = 0.50

When below standard the piece rate will be = 0.50 × 80/100 = Re. 0.40

When above standard the piece rate will be = 120/100 × 0.5 = Re. 0.60

Standard Production:

80 units per week. No. of men working in the group = 10. Bonus for every 25% increase in production, a bonus of Rs. 10 will be shared prorata among the 10 members of the group.

Actual production during a week = 110 units.

Solution:

Increase in production over standard = (110 -80) units = 30 units

i.e. 30/80 × 100 or 37.5%

.^.. Bonus = Rs. 10 + 12.5/25 × Rs. 10

= Rs. 10 + 5 = Rs. 15

Each member of the group, therefore, receives = Rs. 15 ÷ 10 = Rs. 1.50

Worked-out Problems:

Problem 1:

Calculate by the Halsey Premium Plan and determine on this basis the total earnings of a worker by the given data:

Standard time for work – 20 hours

Actual time – 16 hours

Rate per hour – Rs. 2

Solution:

Total Earnings = Time taken × Rate per hour + 50% (Time saved x Rate per hour).

Standard time = 20 hours

Time taken = 16 hours

.^.. Time Saved = Standard time – Time taken i.e. 20 hours – 16 hours = 4 hours.

.^.. Total Earnings = 16 × 2 + 50/100 (4 × 2) = 32 + 4 = Rs. 36

Total Earnings under Halsey Premium Plan = Rs. 36

Problem 2:

From the following particulars, calculate the cash required for wages in a company, during the month of January 2007:

Solution:

Problem 3:

From the following calculate the total monthly remuneration of each of three workers A, B and C:

(i) Standard production per month per worker = 1,000 units

(ii) Actual production during a month: A = 890 units, B = 720 units, C = 960 units.

(iii) Piece work rate per unit of actual production = 20 paise

(iv) Dearness wages Rs. 50 per month (fixed)

(v) House Rent allowance Rs. 20 per month (fixed)

(vi) Additional production bonus at the rate of Rs. 5 for each percentage of actual production exceeding 80% of the standard.

Solution:

Working Notes:

1. Calculation of Bonus:

(i) Worker A:

Actual Production = 890 units i.e. 890/1,000 × 100 = 89% efficiency

.^.. Bonus = (89 – 80) × Rs. 5 = Rs. 45

(ii) Worker B:

Actual Production = 720 units i.e. 720/1,000 × 100 = 72% efficiency

.^.. Bonus = Nil

(iii) Worker C:

Actual Production = 960 units i.e. 960/1,000 × 100 = 96% efficiency

.^.. Bonus = (96 – 80) × Rs. 5 = Rs. 80

Problem 5:

During a certain week in September 2006, a worker manufactured 240 articles. Working hours during a week are 48 hours, standard rate Rs. 5 per hour and standard time to manufacture an article is 15 minutes.

Calculate his gross wages for the week according to (a) Piece work with guaranteed weekly wages, (b) Rowan Premium Bonus Plan, (c) Halsey Premium Bonus Plan.

Solution:

(a) Under Piece work with guaranteed weekly wages:

Actual Wages = Time Taken × Rate per hour

= 48 hours × Rs. 5 = Rs. 240

Guaranteed weekly wages = Standard Time × Rate per hour

= 60 hours × Rs. 5 = Rs. 300

Therefore, actual wages is less than guaranteed wages. So the worker will receive guaranteed wages Rs. 300 for the week.

.^.. Rate per hour = Rs. 300/48 hrs. = Rs. 6.25

Working Notes:

(i) Standard time for 240 articles = 240 × 15 minutes

= 3,600 minutes or 60 hours.

Problem 6:

From the following data ascertain the total earnings of each worker separable under (i) Halsey Scheme (50%), (ii) Rowan Scheme. Also calculate the effective hourly rate of wages of the workers under both the schemes:

Solution:

Problem 7:

From the following particulars you are required to calculate under ‘Average Wage Rate’ the labour cost chargeable to Job No. ‘A’ which was completed in 1990:

Basic Wage Rate is Rs. 2 per hour and overtime rates are:

Before or after working hours 150% of basic wage rate.

Sundays and holidays – 200% of basic wage rate.

During the year 1990 the following hours were worked:

Solution:

.^.. Average Wage Rate = 5,70,000/2,50,000 = Rs. 2.28

Now, computation of labour cost under ‘Average Wage Rate’

Items – Job No. ‘A’

Hours Spent – 3,500

Average Wage Rate – Rs. 2.28

.^.. Labour Cost Chargeable = 3,500 hours × Rs. 2.28 = Rs. 7,980

Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. This process of apportionment is also known as departmentalisation of overhead. It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored.

Following points should be considered for primary distribution of items of overheads:

(i) Basis for distribution should be equitable and practicable;

(ii) Method adopted for distribution should not be time-consuming;

(iii) Overhead expenses should be distributed among different departments on the basis of benefits received by departments;

For the purpose of primary distribution, a departmental distribution summary is prepared in the following way:

Basis of Apportionment of Factory Overhead:

Expenses:

1. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc.
2. Insurance on Plant and Machinery, Building; Depreciation on Plant and Machinery; Maintenance of Plant and Machinery.
3. Insurance on tools and fixtures, power, repairs and maintenance cost etc.
4. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. Expenses of wage department
5. Cost of supervision.

Base:

1. Floor area occupied by each department. Light points for lighting.
2. Capital values of Assets.
3. Direct Labour hours or Machinery hours.
4. Number of employees or workers.
5. Time devoted.

Apportionment of Overhead

Secondary Distribution:

In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. Under this backdrop, the second step is to distribute the total cost of service departments among the production departments.

The process of redistributing the cost of service departments among production departments is known as secondary distribution. Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department.

Bases for Secondary Distribution:

Service Department Costs:

(i) Employment department

(ii) Maintenance department

(iii) Purchase department

(iv) Store keeping

(v) Canteen, welfare and recreation

Basis of Redistribution:

(i) Rate of labour-turnover or number of employees.

(ii) Hours worked for each department.

(iii) No. of purchase orders or value of materials purchased.

(iv) No. of requisitions.

(v) No. of employees of each department.

(i) Direct Redistribution Method:

Under this method, service department’s costs are apportioned to production depart­ments only ignoring service rendered by one service department to another. When this method is followed, the number of secondary distribution will be equal to number of secondary department.

(ii) Step Method:

This method of redistribution gives cognizance to the service rendered by one service department to another service department. The cost of service department which renders service to the largest number of other departments is distributed first.

After this is done, the cost of service department serving the next largest number of department is apportioned. This process continues till the cost of last service department is apportioned. The cost of last service department is apportioned among production departments only.

(iii) Reciprocal Distribution Method:

There may be two or more service departments in a factory and they may render service to each other. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments.

There are three methods for dealing with the distribution of inter-departmental services:

(A) Trial and Error Method

(B) Repeated Distribution Method

(C) Simultaneous Equation Method.

A cost sheet is a statement prepared at periodical intervals of time, which accumulates all the elements of the costs associated with a product or production job. It is used to compile the margin earned on a product or job and forms the basis for the setting of prices on similar products in the future.

Objects of Cost Sheet

1. For determining the selling price

A cost sheet helps in determination of selling price of a product or of a service. Cost sheet ascertains cost at each stage of the product and also the total cost of the product, where a margin of profit is added and thus the selling price is ascertained.

2. Facilitating in managerial decision making

Preparation of cost sheet helps managers at various levels in their decision-making process such as

• To produce or buy a component,
• What price of goods to quote in the tender,
• Whether to retain or replace an existing machine,
• How to reduce costsand maximize profit.
• Identify and make decisions whether they need to continue with the product or not.

3. Preparation of budgets

Organizations can prepare a budget with the help of a cost sheet. We can prepare the budget by using the current or previous year’s data.

Elements of Cost

Prime Cost: It comprises of direct material, direct wages, and direct expenses. Alternatively, the Prime cost is the cost of material consumed, productive wages, and direct expenses.

Factory Cost: Factory cost or works cost or manufacturing cost or production cost includes in addition to the prime cost the cost in indirect material, indirect labor, and indirect expenses. It also includes amount or units of WIP or incomplete units at the end of the period.

Cost of Production: When Office and administration cost at the end of the period are added to the Factory cost, we arrive at the cost of production or cost of goods sold. Here, we make an adjustment for opening and Closing finished goods.

Total Cost: Total cost or alternatively cost of sales is the cost of production plus selling and distribution overheads.

• A Cost Sheet depicts the following facts:
• Total cost and cost per unit for a product.
• The various elements of cost such as prime cost, factory cost, production cost, cost of goods sold, total cost, etc.
• Percentage of every expenditure to the total cost.
• Compare the cost of any two periods and ascertain the inefficiencies if any.
• Information to management for cost control
• Calculate and summarize the total cost of the product.

Proforma of a Cost Sheet

	PARTICULARS	AMOUNT	AMOUNT
			TOTAL
	DIRECT MATERIAL-PURCHASED
ADD	OP STOCK OF RAW MATERIAL
LESS	CL STOCK OF RAW MATERIAL
	MATERIAL CONSUMED
ADD	DIRECT WAGES
ADD	DIRECT EXPENSES
	PRIME COST
ADD	WORKS OR FACTORY OVERHEADS
	Factory Overheads
ADD	OP STOCK OF WIP
LESS	CL STOCK OF WIP
	WORK COST
ADD	ADMINISTRATION OR OFFICE OVERHEADS
	COST OF PRODUCTION
ADD	SELLING AND DISTRIBUTION OVERHEADS
ADD	OP STOCK OF FG
LESS	CL STOCK OF FG
	COST OF SALES
ADD	PROFIT MARGIN
	SELLING PRICE

Method of Preparation of Cost Sheet

Step I	Prime Cost =  Direct Material Consumed + Direct Labour + Direct Expenses Direct Material= Material Purchased + Opening stock of raw material-Closing stock of raw material.
Step II	Works Cost = Prime Cost + Factory Overheads (Indirect Material + Indirect Labour + Indirect Expenses)+opening Work in progress-Closing Work in progress
Step III	Cost of Production = Works Cost + Office and Administration overheads + Opening finished goods-Closing finished goods
Step IV	Total Cost = Cost of Production + Selling and Distribution Overheads
Profit	Sales – Total Cost