Business Process Analysis

28. Because of shortages of labour and materials, a department in a factory is working at 55 percent
of its normal capacity. In its cost records, it charges manufacturing overhead to work-in-process
as a percentage of direct labour.
For the current year, budgeted direct labour cost is ` 2,50,000 and budgeted manufacturing
overhead is ` 2,25,000 (Fixed ` 1,00,000 and variable ` 1,25,000)
A dispute has arisen as to the percentage of direct labour which should be charged to work-in-
process. One officer claims that it should be 90 per cent; another claim that it should be much less
than this.
Give your opinion and a brief reason for it.
[Ans: 72%]

2.6 COST SHEET

In the preceding sections, we have dealt with the basic concepts of costs and the various elements of
costs. We have also seen the different steps followed in determination of cost of a product or rendering
a service. Treatment of various costs has been discussed at length. You are by now very well aware
that the term cost has wide connotations and would not mean anything in isolation. Costs must be
understood if they are to be controlled. Measurement of costs is the first step in the process of control
simply because you cannot control unless you measure. Measurement of cost would mean different
when applied to different industries.
The cost has to be measured with respect to the cost centers first and then at a broader level with
respect to the cost unit. The journey towards the aim of determining cost of a product or service may
take various routes. But the logic is same i.e. collect all relevant costs in the process of converting raw
material into finished product and accumulate the total costs.
To put in simple words, to generate any product or service, resources are needed called as inputs.
Theses inputs are used in a process of conversion. The end result is the output which could either be a
product or a service. The resources consume costs. While determining total cost of resources, the costs
of all resources used (directly or indirectly) in the process are accumulated. This requires establishing
the relationship between the resource and the product or service.

Process - One or many

Input/resources operations - independent Output - Finished
or sequential

Basic law Labour, staff, facilities, utilities

The process of accumulating costs will differ according to the nature of business and the activities carried
out. The common way to accumulate costs is to prepare cost sheets.
Cost Accumulation
The logic of Cost Accumulation is to track costs in the same sequence as the resources get used. See
the following flow of activities:
(a) Raw material & other material are purchased and stored
(b) The material is used up in process of conversion
(c) People or machines work upon the material while in the process
(d) The process results into some products that are finished
2.166 I COST ACCOUNTING AND FINANCIAL MANAGEMENT
The cost data needs to be collected along this whole chain that ends when a final product is produced.
The cost accumulation is done based on the source documents which are used in booking the costs.
Depending upon the type of business, a cost unit is determined for which costs must be accumulated.
The departmentalisation of the business organisation is done to suit the production process. For example,
in a fruit processing industry, the costs would be accumulated as per different process involved i.e.
cutting, pulp formation, blending, purifying and final packing. As the physical flow of material happens
from one process to the other, costs are also passed on from one process to the next in line.
For the purpose of convenience, a cost tree in the following format explains the composition of costs.

Total Cost

Material Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

As we know all the direct element of cost together make Prime Cost. Sequentially, production overheads
are added to get Factory Cost or Works Cost. Then Administration overheads are added to the Factory
Cost to get Cost of Production. Once the product is ready for sale, the selling and distribution overheads
are added to get Cost of Sales or Cost of Goods Sold. When this is deducted from Sales revenue we
get profit or loss.
Process of accumulation of cost comprises of:
l Identification of costs to the cost centers or departments.
l Apportionment of service costs to production costs.
l Absorption of costs into cost units.
Cost Collection
Cost Collection is the process of booking costs against a particular Cost Account code under a particular
cost center or directly under a cost unit, as the case may be. Source documents are used to generate
the record of the costs incurred or to be incurred. These source documents are properly authorised and
numbered. They act as the primary source of entry. In additions to these documents there could be
other documents and reports such as allocation sheets, labour utilisation reports, idle time & overtime
analysis, scrap reports etc which help in identifying costs. Let us see how the costs are collected.
Material costs
These costs are identified with cost unit with the help of ‘stores issue summary’. In case of job costing,
there will be job-wise summary prepared on the basis of ‘material issue notes’. In case of contracts,
the summary will be made contract-wise. At times instead of procuring & storing material, it may be
procured and directly used on contract site. ‘Purchase Invoice’ may be the basis to capture such direct
material costs. In case of process industry, the material is issued to different processes. Here, the costs
input to a process may be collected based on the cost of materials processed in the previous process. A
process-wise summary of material issues is maintained. Some material may get added to a process but
may not become part of final product. The cost of such material is apportioned on the output of that
process. The indirect material costs may be gathered on the basis of consumable issues, scrap reports,
standard parts list etc. Care should be taken to account for material losses. Normal material losses are
to be apportioned to the good units produced, whereas, abnormal losses should be excluded from
computation of cost of good units and should be directly taken to P & L Account.

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Labour Cost
Salaries and wages summary prepared after the monthly payroll run is the main basis for labour cost
collection. The summary shows department-wise break up, so that the Direct Labour Cost of production
department is separately known and that for the other indirect departments is also available to be
charged as overheads. In case of contracting business, labour force is usually dedicated to various sites.
The cost of labour used on different contracts can be found based on wages sheet maintained for each
contract site. In addition, the idle time reports, overtime reports are used for booking of the costs of idle
time & overtime. In case labourers are common to various jobs or contracts or processes, an estimate
of the time that they spend on each of them is made and the costs are allocated accordingly.
Expenses
Accounting entries in cash book or journal proper help to collect the expenses. Direct expenses which
are job or contract or process specific may be collected on the basis of vouchers. The indirect expenses
are collected and then apportioned in a summarised form using apportionment sheets.
Collection of Budgeted costs
The cost calculation for the selected cost unit could be either of actual cost or budgeted cost. While
actual costs are collected on the basis of documents explained above, the budgeted costs are
computed using the standard bill of material, and predetermined overhead rates. For budgeted direct
material, a bill of material is prepared for each product (including sub-assemblies). This is a quantitative
estimate. Based on the estimates a budgeted material price is considered to value the material cost.
Estimated labour hours are costed using estimated Labour Hour Rates. Pre-determined overheads are
also computed considering the base selected for absorption. Thus an estimate of total cost with full
composition may be made.
Cost Accountant & Cost Data collection
The Cost Accountant must play a pivotal role in ensuring that the process of cost data collection is
very strong. The cost analysis and reporting will not be useful for managerial decision-making if the
data collection process is wrong. Presence of a strong and robust Costing System is needed to ensure
comprehensive data collection process. The Costs Account may carry out periodical checks to evaluate
the system and also may do the Internal Audit. He can use all his expertise in the process of establishing
cost estimates which will help in decision making.
Cost data collected must be reported in proper format to make it more informative and meaningful. As
can be understood, the report must serve the purpose for which it was sought. A complete cost sheet
may not be always necessary. The production manager may require the cost of production only. The
cost report should be able to give this figure separately broken up into all its elements. The sales and
marketing cost may be given for each channel of distribution, customers, regions etc in addition to the
product-wise break up.
The cost data should be collected in a manner that will make available cost information to all those
who are responsible for the costs. A cost sheet should give the figures of each element of cost broken
up into direct and indirect and also according to functions like production, administration and selling
& distribution. It is therefore logical that the format of the Cost Sheet is derived from the requirements
for which it is to be used. Apart from exhibiting the total cost deducted logically, it should highlight
other cost also, so that comparison with budget can be made, variances analysed and cost could be
controlled to increase profits.
Cost Sheet Formats & Preparation
The cost concept itself being subjective, there is no standard format in which the collected costs can
be presented. It has to suit the type of business, need of the details, and management’s requirement
of control over costs. Yet a simple way to show the Total Cost of any cost unit is shown below:

2.168 I COST ACCOUNTING AND FINANCIAL MANAGEMENT

Specimen Cost Sheet

Period From …………………… Cost Units

To ……………………………………… …………
Cost Items Amount (`) Amount (`)
Direct Material
Opening Stock xxxxx
Add: Purchases xxxxx
Add: Incidental charges xxxxx
Less: Closing Stock xxxxx xxxxx
Direct Labour xxxxx
Direct Expenses xxxxx
PRIME COST xxxxx
Add: Production Overheads xxxxx
Add: Opening work in process xxxxx
Less: Closing work in process xxxxx xxxxx
FACTORY COST OR WORKS COST xxxxx
Add: Administrative Overheads xxxxx
COST OF GOODS MANUFACTURED xxxxx
Add: Opening Finished goods stock xxxxx
Less: Closing Finished goods stock xxxxx xxxxx
COST OF FINISHED GOODS SOLD xxxxx
Add: Selling & Distribution overheads xxxxx
COST OF GOODS SOLD xxxxx
You can observe the logical way in which the cost flow has been shown in the above chart. The focus
in this specimen is on elements and functions split further into direct and indirect costs with respect to
the cost units. Although the formats could be different, the contents of a cost sheet must be understood
and interpreted correctly so that one can analyse it for control and decision making. For example if it
has to be prepared for a process industry, the format would reflect the portion up to factory cost for
each process separately. Then the administration costs will be added together. The cost per unit will be
computed for every process separately. The stock for processes subsequent to process one will mean
stocks transferred from earlier processes and stocks transferred to the next processes. The objective here
is to compute the cost per process. The cost sheet format here could be:
Specimen Cost Sheet

Period From ………………… To ………………………………… Cost Units

…………
Cost Items Amount (`) Amount (`)
Direct Material
Opening Stock xxxxx
Add: Purchases xxxxx
Add: Incidental charges xxxxx
Less: Closing Stock xxxxx xxxxx
Direct Labour xxxxx
Direct Expenses xxxxx
PRIME COST xxxxx

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Add: Production overheads xxxxx

Add: Opening work in process xxxxx
Less: Closing work in process xxxxx xxxxx
FACTORY COST OR WORKS COST xxxxx
Add: Administrative Overheads xxxxx
COST OF GOODS MANUFACTURED xxxxx
Add: Opening Finished goods stock xxxxx
Less: Closing Finished goods stock xxxxx xxxxx
COST OF FINISHED GOODS SOLD xxxxx
Add: Selling & Distribution overheads xxxxx
COST OF GOODS SOLD xxxxx
Depending on number of processes, the working will be shown up to factory cost. Subsequently, the
administration, selling & distribution overheads are added like that shown in the first format. Some
process companies may prepare a different cost sheet for each process. When it is available process
wise, control of process costs and process losses could be better controlled by the concerned process
managers.
Important Components of Cost Sheet
(a) Cost sheet has reference to the job or contract or a batch or production or a service undertaken
to be rendered. If the completion of the job at hand relates to more than one accounting period,
it is better that separate columns are provided to mention figures for those period. The job or batch
reference should also be mentioned on the header.
(b) If there is an estimate made for the costs, a separate column must be provided for estimated costs
against which the actual costs should be plotted to get ready comparison. This will make cost sheets
more user-friendly and meaningful.
(c) In certain cases, material may not form any significant portion of the total cost and as such may
be treated as an overhead item. In such cases, the Prime Cost will mainly constitute as labour and
other expenses.
(d) Treatment of raw material stocks should be carefully understood. As the costs are to be linked to
the units produced, the material consumption, completion of earlier period’s semifinished goods
and the finished goods sold needs to be properly computed.
Raw Material Consumed: Opening Stock + Purchases – Closing Stock
One has to go into the depth of this arithmetical formula. Where do we get the figure of purchases
from? It is from the suppliers invoices for purchase of stockable material. It also should include all charges
incidental to purchase of goods like carriage, insurance, customs duty etc. which is directly associated
with the incoming material.
As we know that the stocks are always valued at cost or market price whichever is less. This norm has
to be applied to the rates of all the items of material in stock, and then the total valuation of stock is
done. The stock ledger records all receipts and issues of the quantity and rate of material items. The
valuation of material issues has to be properly done based on correctly chosen method of issue pricing.
This summary figure as per the issue column should exactly match with the raw material consumed figure
as included in the cost sheet.
The normal losses on account of material shortages must be included in the cost of raw material
consumed. Care should be taken to remove the abnormal losses there from.
(e) Treatment of work in process is another important step. If the format is carefully seen, it will be noticed
that the cost of WIP stocks is adjusted specifically after adding Factory Overheads! Why adjusted?
And why at that stage only? Please note that Cost Sheet is prepared for a period of time for a cost

2.170 I COST ACCOUNTING AND FINANCIAL MANAGEMENT

 unit. At the beginning of that period, if the job has been carried forward from the previous period,
there may be some partly finished work that is carried forward. At the same time there may be
partly finished production at the end of current period. These stocks must be adjusted to reflect
the cost consumed during the current period. Further, the work in process is normally valued at
Factory Cost. It does not include Administration Overheads as the production of goods is not yet
fully complete. Administration costs are absorbed at the stage of finished production. Hence the
adjustment of WIP stocks is to be done before adding the Administration Overheads.
(f) Similarly, the adjustment for the opening and closing stocks of finished goods should be done. This
has to be done after the stage of cost of production.
(g) One could have separate columns for total costs and per unit costs side by side. This will help have
a quick glance at the per unit figures. Management at operating level will find this very helpful.
Cost Sheet format for Service Costing
The Cost Sheet format for Service Costing takes into account the requirements of different types of
services. It could be used to find out cost of internal services like boiler house, maintenance of delivery
van fleet etc. In such cases the main purpose is to control the costs. It could also apply in case of
services that are sold such as transport companies, hospitals, hotels, etc. Selling services and making
profit thereon is the main purpose of these services.
As we know, material costs constitute a lower proportion of the total costs and the proportion of labour
and other expenses is higher. As most of the costs are indirect, it is difficult to accumulate costs in the
traditional format as shown above, neither is it useful. Hence, the emphasis is on variability of expenses.
The cost collection is also done in the same manner. All items of costs are bifurcated into:
(a) Fixed or Standing Costs;
(b) Maintenance Expenses; and
(c) Other Variable or Running Expenses
Based on this bifurcation a Cost Sheet is prepared. In most of the services, the cost unit is a composite
unit such as per passenger-kilometer, per patient-bed, per Kilo-Watt-Hour, per room day etc. In such
cases it is necessary that quantity of the cost units is properly mentioned in the Cost Sheet so that per
unit cost can be correctly calculated.
Here are some examples of contents of Cost Sheets for different services:
(a) Transport: The costs are shown under the heads of fixed expenses, running expenses and
maintenance expenses. The fixed expenses will be time related such as salaries, garage rent, insurance
etc. The maintenance charges will be like tyres & tubes, repairs, etc. The operating expenses will mainly
include petrol, diesel & fuel oil, drivers & cleaners’ wages etc. The cost unit data will comprise of mileage
run, tonnage carried, days on road etc. The specimen Cost Sheet format is shown below:

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Specimen Cost Sheet – Transport Service

Period From ……………..........… To ….................……………………… Vehicle No. xx Vehicle No. yy

Cost Items Amount (`) Amount (`)
Operating Costs
Petrol Xxxxx Xxxxx
Diesel Xxxxx Xxxxx
Engine Oil Xxxxx Xxxxx
Driver’s wages Xxxxx Xxxxx
Cleaner’s wages Xxxxx Xxxxx
Depreciation
Xxxxx Xxxxx
Sub – total
Xxxxx Xxxxx
Maintenance Costs
Tyres and tubes Xxxxx Xxxxx
Painting, denting Xxxxx Xxxxx
Cleaning & Overhauls Xxxxx Xxxxx
Sub – Total Xxxxx Xxxxx
Fixed Costs
Garage rent Xxxxx Xxxxx
Insurance Xxxxx Xxxxx
Taxes Xxxxx Xxxxx
Road permits Xxxxx Xxxxx
General supervision Xxxxx Xxxxx
Sub – Total Xxxxx Xxxxx
Grand Total Xxxxx xxxxx
Cost Units Xxxxx Xxxxx
Mileage run Xxxxx Xxxxx
Days on road Xxxxx Xxxxx
Load carried (tones) Xxxxx Xxxxx
Capacity utilization % Xxxxx Xxxxx
Total Tonne-miles Xxxxx Xxxxx
Cost per tone-mile
(b) Boiler house: It generates steam that is used in production activity. Main items of costs are fuel &
labour, power, fuel handling, ash removal, water softening, maintenance etc. The cost unit will be
cubic feet.
Specimen Cost Sheet – Boiler House

Period From …………… To …………………………… Total Cost Cost per 1000 hours
Steam produced in 1000 hours …………………………………..
Less: used in boiler house ………………………………………
Less: Lines losses
Net Production

2.172 I COST ACCOUNTING AND FINANCIAL MANAGEMENT

Cost Items Amount (`) Amount (`)
Fuel & Labour
Fuel oil Xxxxx Xxxxx
Electric power Xxxxx Xxxxx
Fuel handling Xxxxx Xxxxx
Ash removal & disposal Xxxxx Xxxxx
Direct wages Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Water
Storage xxxxx xxxxx
Softening xxxxx xxxxx
Sub-Total xxxxx xxxxx
Maintenance
Boiler cleaning Xxxxx Xxxxx
Coal bunkers Xxxxx Xxxxx
Economisers Xxxxx Xxxxx
Mechanical stokers Xxxxx Xxxxx
Service pipes Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Fixed Costs
Supervision Xxxxx Xxxxx
Rent Xxxxx Xxxxx
Depreciation Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Grand Total Xxxxx Xxxxx
(c) Power House: The main components of cost are steam production and electricity generation.
The former comprises of coal, water, wages, maintenance etc. and the later contains steam
consumption, wages, supervision etc. Cost units will be for steam produced and electricity
generated.
Specimen Cost Sheet – Power House

Period From ……………… To ……………………… Total Cost Cost per KWH

Electricity generated in KWH ……………..
Less: Lines losses
Net production
Cost Items Amount (`) Amount (`)
Steam Production Costs
Coal bunkers Xxxxx Xxxxx
Water Xxxxx Xxxxx
Wages Xxxxx Xxxxx
Maintenance of boilers Xxxxx Xxxxx
Depreciation Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Less: Used for heating purposes
Steam used for electricity generation Xxxxxx Xxxxxx

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Business Process Analysis

Electricity Generation Costs

Wages Xxxxx Xxxxx
Stores Xxxxx Xxxxx
Maintenance of Power Generators Xxxxx Xxxxx
Repairs Xxxxx Xxxxx
Transmission lines Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Grand Total Xxxxxx Xxxxxx
(d) Canteen: Here the cost will be labour, consumption of provision such as vegetables, meat, fruits,
and other costs like depreciation, maintenance, power & electricity etc. In case canteen is an
internal service, it is subsidised. The company contributes a portion of the costs. From total costs
subsidy is reduced and then the net costs are reflected.
Specimen Cost Sheet – Canteen

Period From …………………… To ……………………………………… Total Cost Cost per meal

Number of meals
Less: Meals consumed by staff
Net Meals
Cost Items Amount (`) Amount (`)
Provisions
Meat, fish, eggs Xxxxx Xxxxx
Vegetables Xxxxx Xxxxx
Fruits Xxxxx Xxxxx
Milk Xxxxx Xxxxx
Tea, Coffee Xxxxx Xxxxx
Bread, Cakes Xxxxx Xxxxx
Others Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Wages & Salaries
Cooks Xxxxx Xxxxx
Cleaning Staff Xxxxx Xxxxx
Helpers & Servers Xxxxx Xxxxx
Supervision Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Services
Steam, Gases Xxxxx Xxxxx
Electricity & Lights Xxxxx Xxxxx
Power Xxxxx Xxxxx
Sub-total Xxxxx Xxxxx
Fixed Costs
Rent Xxxxx Xxxxx
Depreciation Xxxxx Xxxxx
Sub-Total Xxxxx Xxxxx
Grand Total Xxxxx Xxxxx
Similarly one can develop Cost Sheets for other services like education, BPO, consulting etc. The basic
idea is to be able to correctly report costs for the selected cost unit. In case of services, comparison
with budgets will enable the management to control cost of services in a better way.

2.174 I COST ACCOUNTING AND FINANCIAL MANAGEMENT