AccountancyCost sheet: format and a solved example
Financial accounts tell you the profit of the whole business. A cost sheet tells you what one unit costs to make and sell, layer by layer.
Cost accounting in one paragraph
Financial accounting reports the result of the business as a whole to outsiders. Cost accounting looks inside: it finds the cost of each product, job or process, so that prices can be fixed, waste controlled and decisions taken. Its basic statement is the cost sheet: a statement that builds up the total cost of the output of a period step by step, and usually shows the cost per unit.
Elements of cost
| Element | Direct (traceable to the product) | Indirect (overheads) |
|---|---|---|
| Material | Raw material that becomes part of the product: wood in a table | Glue, oil, cotton waste, small tools |
| Labour | Wages of workers who make the product | Wages of supervisors, watchmen, storekeepers |
| Expenses | Costs of a specific job: royalty, hire of special equipment | Rent, power, insurance, depreciation |
Overheads are grouped by function: factory (works) overheads, office and administration overheads, and selling and distribution overheads.
The layers of cost
- Prime cost = Direct materials consumed + Direct labour + Direct expenses.
- Works (factory) cost = Prime cost + Factory overheads, adjusted for opening and closing work in progress.
- Cost of production = Works cost + Office and administration overheads.
- Cost of goods sold = Cost of production + Opening stock of finished goods − Closing stock of finished goods.
- Cost of sales (total cost) = Cost of goods sold + Selling and distribution overheads.
- Sales = Cost of sales + Profit.
Direct materials consumed = Opening stock of raw materials + Purchases (with carriage inwards) − Closing stock of raw materials.
Solved example
From the following figures of Vindhya Furniture for the year ended 31 March 2026, prepare a cost sheet. Output for the year was 10,000 chairs.
| Item | ₹ | Item | ₹ |
|---|---|---|---|
| Opening stock of raw materials | 40,000 | Factory overheads | 1,04,000 |
| Purchases of raw materials | 3,60,000 | Office and administration overheads | 62,000 |
| Closing stock of raw materials | 50,000 | Selling and distribution overheads | 68,000 |
| Direct wages | 1,50,000 | Opening work in progress | 16,000 |
| Direct expenses | 20,000 | Closing work in progress | 20,000 |
| Opening stock of finished goods | 38,000 | Sales | 9,35,000 |
| Closing stock of finished goods | 40,000 |
| Particulars | ₹ | ₹ |
|---|---|---|
| Opening stock of raw materials | 40,000 | |
| Add: Purchases | 3,60,000 | |
| 4,00,000 | ||
| Less: Closing stock of raw materials | 50,000 | |
| Direct materials consumed | 3,50,000 | |
| Direct wages | 1,50,000 | |
| Direct expenses | 20,000 | |
| PRIME COST | 5,20,000 | |
| Add: Factory overheads | 1,04,000 | |
| Add: Opening work in progress | 16,000 | |
| Less: Closing work in progress | (20,000) | |
| WORKS COST | 6,20,000 | |
| Add: Office and administration overheads | 62,000 | |
| COST OF PRODUCTION | 6,82,000 | |
| Add: Opening stock of finished goods | 38,000 | |
| Less: Closing stock of finished goods | (40,000) | |
| COST OF GOODS SOLD | 6,80,000 | |
| Add: Selling and distribution overheads | 68,000 | |
| COST OF SALES | 7,48,000 | |
| Profit (balancing figure) | 1,87,000 | |
| SALES | 9,35,000 |
Reading the result
- Prime cost is ₹5,20,000; works cost ₹6,20,000; cost of production ₹6,82,000.
- Cost of production per chair = ₹6,82,000 ÷ 10,000 = ₹68.20.
- Profit is ₹1,87,000, which is 25% on cost of sales and 20% on sales.
Profit on cost and profit on sales
The two percentages describe the same profit from two bases, and questions switch between them.
| If profit is | Then it equals |
|---|---|
| 25% on cost (1/4 of cost) | 20% on sales (1/5 of sales) |
| 20% on cost (1/5 of cost) | 16.67% on sales (1/6 of sales) |
| 33.33% on cost (1/3 of cost) | 25% on sales (1/4 of sales) |
| 50% on cost (1/2 of cost) | 33.33% on sales (1/3 of sales) |
Rule: a profit of 1/n on cost is 1/(n + 1) on sales. To find the selling price for a desired profit on sales, divide cost by (1 − rate). Example: cost ₹7,48,000 and desired profit 20% on sales gives ₹7,48,000 ÷ 0.8 = ₹9,35,000.
Items left out of a cost sheet
Costs that are purely financial, or are appropriations of profit, are not part of cost:
- Interest on loans, cash discount, loss on sale of assets or investments.
- Income tax, dividends, transfers to reserves.
- Donations and charity.
- Goodwill and preliminary expenses written off.
- Incomes not related to production: interest and dividend received, profit on sale of assets.
Because of these items, the profit shown by the cost sheet usually differs from the profit in the financial accounts. A reconciliation statement explains the difference.
Treatment of some special items
- Sale of scrap from materials: deducted from factory overheads or works cost.
- Carriage inwards and octroi on materials: added to purchases of raw materials.
- Carriage outwards, packing for delivery, salesmen's commission: selling and distribution overheads.
- Factory rent, power, depreciation of plant, supervisor's salary: factory overheads.
- Office rent, audit fees, directors' fees, office salaries: office and administration overheads.
Estimated cost sheets and tenders
A cost sheet can also look forward. To quote a price for a new order, the firm estimates the materials and wages the job will need and adds overheads at the percentages found from past cost sheets: for example factory overheads as a percentage of direct wages, and office overheads as a percentage of works cost. In the example, factory overheads are ₹1,04,000 on wages of ₹1,50,000, about 69.33% of direct wages; office overheads are ₹62,000 on works cost of ₹6,20,000, exactly 10%.
Questions students ask
What is prime cost?
The total of direct materials consumed, direct labour and direct expenses. It is the first layer of cost in a cost sheet.
Is interest on a loan included in a cost sheet?
No. Purely financial items such as interest, and appropriations such as tax and dividend, are excluded from cost.
How do I convert profit on cost into profit on sales?
A profit of 1/n on cost equals 1/(n + 1) on sales. For example 25% (one quarter) on cost is 20% (one fifth) on sales.
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For study, and independent. These pages explain accountancy as it is generally taught in Class 11, Class 12 and B.Com courses in India, in our own words with our own examples, reviewed in November 2026. This site is not connected with NCERT, CBSE, ICAI or any board or university. Syllabuses change: follow your own board's or university's current syllabus and textbook. Nothing here is professional accounting, tax or legal advice.