The first thought that comes up after reading cost sheet is that it may be a sheet on which we record all the cost and bang on its correct. Now cost in respect of what? Cost might be in respect of anything you just see around you i.e. laptop, cell phone, calculator, pen, pencil, printer, etc. (actually millions of products) and also includes various other services such as transportation, education, canteen, hotel, hospital, etc. We just need to think that what all cost must be incurred in respect of the said product or service and on recording it on a piece of paper we get the desired result i.e. Cost Sheet.


A Cost Sheet or Cost Statement is “a document which provides detailed cost information” on the basis of functional classification. However, other classification may be adopted depending upon users of the information. It is made for a particular period (daily, weekly, monthly, quarterly, half yearly or yearly) on Actual or Estimated basis. The cost sheet of a product / service / business provides an insight into its performance and efficiency. It helps in competitive analysis and improvement of the business operations through cost reduction.


(i)     Direct Material Cost

(ii)     Direct Employee (labour) Cost

(iii)    Direct Expenses

(iv)    Production / Manufacturing Overheads

(v)     Administration Overheads

(vi)    Selling Overheads & Distribution Overheads

(vii)   Quality Control costs

(viii)  Research and Development costs etc.


(i)      Direct Material Cost: It is the cost of direct material consumed. The cost of direct material consumed is calculated as follows:

Opening Stock of Material Add: Additions/ Purchasesxxx


Less: Closing stock of Material(xxx)
Direct materials consumedxxxx

The valuation of materials purchased and issued for production shall be done as per methods discussed in the ‘Chapter- 2 Material Cost’.

(ii)     Direct Employee (labour) Cost: Total of payments made to the employees engaged in the production of goods and provision of services. Employee costs include wages and salary; Allowances and incentives; Payment for overtimes; Employer’s contribution to Provident fund and other welfare funds; other benefits (leave with pay, free or subsidized food, leave travel concession etc.).


(iii)    Direct Expenses : Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a product or for provision of service and can be directly traced in an economically feasible manner to a cost object. The following costs are examples for direct expenses: Royalty paid/ payable for production or provision of service; Hire charges paid for hiring specific equipment; Cost for product/ service specific design or drawing; Cost of product/ service specific software; Other expenses which are directly related with the production of goods or provision of service.

 (iv) Factory Overheads: It is also known as works/ production/ manufacturing overheads which includes the following:

(a)     Consumable stores and spares.

(b)     Depreciation of plant and machinery, factory building etc.

(c)     Lease rent of production assets.

(d)     Repair and maintenance of plant and machinery, factory building etc.

(e)     Indirect employees cost connected with production activities.

(f)      Drawing and Designing department cost.

(g)     Insurance of plant and machinery, factory building, stock of raw material & WIP etc.

(h)     Amortized cost of jigs, fixtures, tooling etc.

(i)      Service department cost such as Tool Room, Engineering & Maintenance, Pollution Control etc.


(v)     Stock of Work-in-process: The cost of opening and closing stock of work-in- process is adjusted to arrive at factory/ works cost. The WIP stock is valued on the basis of percentage of completion in respect of each elements of cost.


(vi)    Quality Control Cost: This is the cost of resources consumed towards quality control procedures.


(vii)   Research & Development cost: It includes only those research and development related cost which with is incurred to improvement of process, system, product or services.


(v)     Administrative Overheads: It includes the cost of production administration only. The general administration overhead is not included in production cost.


(vi)    Credit for recoveries: The realised or realisable value of scrap or waste is deducted.


(vii)   Packing Cost (primary): Packing material which is essential to hold and preserve the product for its use by the customer.


 (viii) Administrative Overheads: It is the cost related with general administration of the entity. It includes the followings:

(a)     Depreciation and maintenance of machines, building, furniture etc. of corporate or general management.

(b)     Salary of administrative employees, accountants, directors, secretaries etc.

(c)     Rent, insurance, lighting, office expenses etc.


(ix)    Selling Overheads: It is the cost related with sale of products or services. It includes the following costs:

(a)     Salary and wages related with sales department and employees directly related with selling of goods.

(b)     Rent, depreciation, maintenance and other cost related with sales department.

(c)     Cost of advertisement, maintenance of website for online sales, market research etc.


(x)     Packing cost (secondary): Packing material that enables to store, transport, inform the customer, promote and otherwise make the product marketable.


(xi)    Distribution Overheads: It includes the cost related with making the goods available to the customers. The costs are

(a)     Salary and wages of employees engaged in distribution of goods.

(b)     Transportation and insurance costs related with distribution.

(c)     Depreciation, hire charges, maintenance and other operating costs related with distribution vehicles etc.


Specimen Format of Cost Sheet for a Manufacturing entity

ParticularsTotal Cost (Rs.)Cost per unit (Rs.)
1.Direct materials consumed:
–        Opening Stock of Raw Materialxxx
–        Add: Additions/ Purchasesxxx
–        Less: Closing stock of Raw Materialxxx
2.Direct employee (labour) costxxx
3.Direct expensesxxx
4.Prime Cost (1+2+3)xxx
5.Works/ Factory Overheadsxxx
6.Gross Works Cost (4+5)xxx
7.Add: Opening Work in Processxxx
8.Less: Closing Work in Process(xxx)
9.Works/ Factory Cost (6+7-8)xxx
10.Quality Control Costxxx
11.Research and Development Costxxx
12.Administrative Overheads (relating to production activity)xxx
13.Less: Credit for Recoveries/Scrap/By-Products / misc. income(xxx)
14.Add: Packing cost (primary)xxx
15.Cost of Production (9+10+11+12-13+14)xxx
16.Add: Opening stock of finished goodsxxx
17.Less: Closing stock of finished goods(xxx)
18.Cost of Goods Sold (15+16-17)xxx
19.Add: Administrative Overheads (General)xxx
20.Add: Marketing Overheads
–        Selling Overheadsxxx
–        Distribution Overheadsxxx
21.Cost of Sales (18+19+20)xxx


  1. It gives total cost and cost per unit for a particular period.
  2. It gives information to management for cost control.
  3. It provides comparative study of actual current costs with the cost of corresponding periods, thus causes of inefficiencies and wastage can be known and suitably corrected by management.
  4. It acts as a guide to manufacture in formulation of suitable and definite policies and in fixing up the selling price.
  5. It facilitates the preparation of cost estimates required for submitting
  6. The preparation of a cost statement is an essential document for the application of Kaizen costing in the business.


  1. The cost of previous year is not same in the succeeding year. Hence cost data are not highly reliable
  2. Only past performance is available in costing records but the management is taking decisions for the future


Historical Cost Sheet

It is made after the event has already happened. Statement showing expenses already incurred by the organization representing actual cost borne by organization is called historical cost sheet.

Estimated Cost Sheet

It is made before the event has taken place. Statement prepared in advance before the actual production of goods or services takes place. Generally prepared for giving quotations or filling tenders


The following items are of financial nature and thus not included while preparing a cost sheet.

  1. Cash discount
  2. Interest paid
  3. Preliminary expenses written off
  4. Goodwill written off
  5. Provision for taxation
  6. Provision for bad debts
  7. Transfer to reserves
  8. Donations
  9. Income tax paid
  10. Dividend paid
  11. Profit/loss on sale of assets
  12. Damages payable at law etc.


  1. Tool for cost control by managers
  2. One stop solution for total of all costs incurred as well as individual components.
  3. Final Accounts or Final Report of Costing
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