A cost sheet is a form of a financial statement made by businesses and manufacturers to analyse the business expenses. A cost sheet includes all the variable and fixed costs associated with producing a product. With the help of a cost sheet, businesses can decide the product’s price and other aspects.
While manufacturers and large scale businesses mainly prepared cost sheets, the practice has also seeped into smaller and medium business enterprises. Earlier cost sheets had to be prepared by accountants or professionals who had a fair share of knowledge but given the technology today, cost sheets can be prepared on the computer with the help of softwares with a few input details. To know more about it, continue reading the article.
What is a Cost Sheet
A cost sheet is a document that consists of the various costs incurred in producing a product or a group of products. The cost of the raw materials, manufacturing process, packaging and shipping, the expenses, etc., are included.
Once the costs are noted, the owner analyses the cost sheet, the breakeven point, and the income needed to be in profit. Based on this analysis, the selling price of the product is decided.
The cost sheet can be made based on historical costs that have been incurred in the past, or it can be made on estimates that the business owner makes. Based on the nature of the business, the owner decides which price is the fair representation, either previous or the estimated.
Once the cost for the production is calculated, other costs such as wages, salary, electricity and overheads are also included in the cost sheet under a different head.
Components of a Cost Sheet
- Primary Cost
As the name suggests, primary cost is the basic cost incurred in producing a product. From sourcing the raw materials to the other costs incurred in manufacturing the product, all the expenses come under primary cost. Examples of primary costs are raw material, production wages, direct expenses, etc. These costs are also known as Variable Costs as the cost of raw materials and daily wages keep on changing.
- Secondary Cost
Also known as Fixed Costs, these are the costs that are incurred irrespective of the production capacity. Examples such as factory rent, shop rent, prices of equipment, salary for employees, etc., are costs that are pre-decided at the start of a period and do not change on a daily basis. Even if production comes to a halt, these costs need to be incurred.
- Operating and Packaging Cost
The expenses that are incurred in the everyday operations of a business, such as electricity, utility bills, commute expenses, etc., come under operating costs. The expenses related to the final touches and product shipping come under packaging cost. Many businesses combine operating and packaging costs as they come under the everyday operations of the business.
- Total Cost
Based on all the costs mentioned above, the accountant or business owner sums up the total cost of the business, divides it by the production capacity or the number of units produced and comes to the final figures of break-even point and profitability.
Cost Sheet Format
|Direct and Raw Materials||xx|
|Opening stock of raw materials||xx|
|Less: Closing stock||(xx)|
|Total Primary Cost||xx|
|Total Secondary Cost||xx|
|Operating and Packaging Cost|
|Electricity and Water||xx|
|Total Operating Cost||xx|
|Total Cost (1+2+3)||XX|
Breakeven Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)
Profit = Sales – Total Cost
Importance of a Cost Sheet
- Determining selling price and profit: The end goal of every company is to be profitable and grow the business. A business is not sustainable in the long run if it keeps running in losses and cannot keep up with the trend. A cost sheet thus helps the owner understand at what production level the business reaches the break-even point and at what level will it start turning profitable.
Once the profitability is figured out, the owner can also look at what production level can the business be the most profitable and after what economies of scale does the production reduce the profitability. All of this helps make business decisions that understand the long term impact of the business.
- Understanding competitors and customers: Unless you’re a monopoly, the chances are that your business does have competitors. With the help of a cost sheet, you can understand your selling price. Once you have your selling price, you can compare it to your competitors and see how different you are from their selling prices.
If two products are of the same quality and quantity but at different prices, the chances are that customers prefer the cheaper product. You want to ensure your price is at such a level that it matches the competitors so that you do not lose out on the customer base.
A cost sheet thus helps analyse the business from a competitor and customer point of view.
- Making business decisions: Lastly, a cost sheet helps make executive business decisions for the company’s long term. Owners can make one year, three year and five-year business projections based on the production capacity of the business, the profitability and how the customers respond to the product. All of this helps in the future growth of the company.
Cloud Accounting and Cost Sheet
As mentioned at the start of the article, owners do not need to make the cost sheets manually anymore. These cost sheets can be made on cloud accounting softwares with just a few input details. Many online softwares provide these services within just a few clicks. Once you have entered all the basic data on the software, the accounting platform does the job for you. It also generates reports from an analytical point of view to make business decisions based on the data.
Whether you’re a manufacturer, wholesaler, retailer or an SME, formulating a cost sheet for your business is not only important but can also have plenty of added benefits to the business. With today’s technology, you do not even need an accountant to prepare these costs sheets for you. You can do them yourself and understand the future of your business.