Cost Accounting and the Cost Sheet

A weaver in Madurai sells a saree for ₹2,400 and is told that is a fair price. Is it? She cannot know until she knows what one saree costs her to make, and that is the question cost accounting answers.

Its objectives. Cost control and cost computation, pricing and decision-making, valuing inventory, studying profitability by product, and budgeting and performance evaluation.

Methods and techniques. A method is chosen to fit how the product is made: job costing for one-off orders such as furniture, batch costing for garments made in lots, process costing for continuous output such as cement, contract costing for long projects such as a building, and activity-based costing, which spreads overhead by what causes it. A technique is a way of using the figures: standard costing, marginal costing, budgetary control and uniform costing.

Don’t say cost accounting is free of law. Cost accounting has no single statute for all firms. But the Companies Act 2013 lets the Government require cost records and a cost audit for notified classes of company, so some firms must keep them. Check the notification for the sector.

Where it breaks. Costs that cannot be traced to a product, such as head-office salaries, are shared out by a rule, and a different rule gives a different cost. Estimates of future cost can be wrong, and the effort of keeping detailed records must be worth the benefit.

For exams. Know the meaning, the objectives, the comparison with financial accounting and the list of methods against techniques.

Methods follow the product; techniques follow the question.

A bakery’s rent is the same whether it bakes 100 loaves or 1,000. The flour is not. A cost that behaves differently needs a different treatment, and the first step is to sort them.

A semi-variable cost, worked. An electricity bill has a fixed charge of ₹2,000 and ₹5 for each unit of power used. At 400 units the bill is ₹4,000; at 1,000 units it is ₹7,000. The fixed part never moves, and the variable part moves with use.

Don’t confuse fixed with direct. ‘Fixed’ and ‘variable’ describe how a cost changes with output. ‘Direct’ and ‘indirect’ describe whether it can be traced to a product. A supervisor’s salary is fixed and indirect; a piece-rate worker’s wages are variable and direct. A cost can be any combination.

Where it breaks. No cost is fixed for ever. Rent is fixed within a range of output, but a larger plant needs more space. The same holds for the ‘relevant range’ in every textbook: a cost is only fixed or variable within it.

For exams. Give the definition and one example of each type, and state the formula for prime cost and total cost.

Fixed is stuck, variable follows; direct is traced, indirect is shared.

Madurai Handlooms made 4,000 pieces last year. The owner asks: what did each piece cost, and what price gives a 20% profit? A cost sheet builds the answer step by step.

The sheet assumes all pieces made were sold and no work was left in progress. Where there is unfinished work or stock of finished goods, the opening and closing balances of each are adjusted at the matching stage.

Don’t mix up profit on cost and profit on sales. A 20% profit on cost of ₹8,80,000 is ₹1,76,000. As a share of the selling price of ₹10,56,000 it is only 16.7%. Always check which base the question uses.

Where it breaks. Overheads are allocated by a rule (such as per labour hour), so the cost per piece depends on the rule. The sheet is also a statement of the past. It is a guide to price, not a promise that the market will pay it.

For exams. Follow the order of the stages, show each sub-total, and watch the opening and closing stocks and the profit base.

Prime, factory, production, sales, price: each stage adds its own overhead.