Cost sheet Project - Hindustan Petroleum Corporation Ltd

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MEANING OF COST

‘COST’ represents a sacrifice of values, a foregoing or a release of something of value. It is the price

of economic resources used as a result of producing or doing the thing costed. It is the amount of

expenditure incurred on a given thing. Cost has been defined as the amount measured in money or

cash expended or other property transferred, capital stock issued, services performed or a liability

incurred in consideration of goods or services received or to be received. By cost, we mean the

actual cost i.e. historical cost. ICWA (UK) defines cost as the amount of expenditure (actual or

notional) incurred on, or attributable to a specified thing or activity. The object for which the cost is

to be determined can be a product or service

CLASSIFICATION OF COST

Cost classification is the process of grouping costs according to their common features. Costs are to

be classified in such a manner that they are identified with cost center or cost unit.

On the basis of behaviour of cost

Behaviour means change in cost due to change in output. On the basis of behaviour cost is classified

into the following categories:

Fixed Cost

• It is that portion of the total cost, which remains constant irrespective of output up to the capacity

limit.

• It is called as a period cost as it is concerned with period

• It depends upon the passage of time.

• It is also referred to as non-variable cost or stand by cost or capacity cost or ‘’period’ cost. 

• It tends to be unaffected by variations in output 

• These costs provide consitions for production rather than costs of production. 

• They are created by contractual obligations and managerial decisions. Rent of premises, taxes and

insurance, staff salaries constitute fixed cost.

Variable Cost

• This cost varies according to the output 

• In other workds, it is a cost which changes according to the changes in output. 

• It tends of vary in direct proportion to output. 

• If the output is decreased, variable cost also will decrease 

• It is concerned with output or product. Therefore, it is called as a ‘product’ cost. 

• If the output is doubled, variable cost will also be doubled. For example, direct material; direct

labour, direct expenses and variable overheads. 

Semi-variable Cost

• This is also referred to as semi-fixed or partly variable cost

• It remains constant upto a certain level and registers change afterwards. 

• These costs vary in some degree with volume but not in direct or same proportion. 

• Such costs are fixed only in relation to specified constant conditions,. For example, repairs and

maintenance of machinery, telephone charges, maintenance of building, supervision, professional

tax etc.

On the basis of elements of cost 

Elements means nature of items. A cost is composed of three elements: material, labour and

expenses, Each of these three elements cab be direct and indirect.

Direct Cost

It is the cost, which is directly chargeable to the product manufactured, it is easily identifiable. Direct

cost consists of three elements, which are as follows:

Direct Material

• It is the cost of basic raw material used for manufacturing a product. 

• It becomes a part of the product 

• No finished product can be manufactured without basic raw materials 

• It is easily identifiable and chargeable to the product 

• For example, leather in leather wares, pulp in paper, steel in steel furniture, sugarcane for sugar

etc 

• What is raw material for one manufacturer might be finished product for another. 

• Direct material includes the following:

1. All materials specially purchased for production or the process.

2. All components purchased for production or the process.

3. Material transferred from one cost center to another or one process to another.

4. Primary packing materials, wrappings, cardboard boxes etc., necessary for preservation or

protection of product.

5. Some of the items like nails or thread in the store are part of finished product. They are not

treated as direct materials in view of negligible cost.

Direct Labour or Direct Wages

• It is the amount of wages paid to those workers who are engaged on the manufacturing line of

conversion of raw materials into finished goods. 

• The amount of wages can be easily identified and directly charged to the product These workers

directly handle raw material, wip and finished goods on the production line 

• Wages paid to workers operating lathers, drilling, cutting machines etc. are direct wages 

• Direct wages are also known as productive labour, process labour or prime cost labour. 

• Direct wages include the payment made to the following group of workers:

1. Labour engaged on the actual production of the product.

2. labour engaged in aiding the operations viz. supervisor, Foreman, Shop clerks and worker on

internal transport.

3. Inspectors, Analysts needed for such production

Direct Expenses or chargeable Expenses

• It is the amount of expenses which is directly chargeable to the product manufactured or which

may be allocated to product directly 

• It can be easily identified with the product. For example, hire charges of a special machine used for

manufacturing a product, cost of designing the product, cost of patterns, architects fees/surveyors

fees, or job cost of experimental work carried out especially for a job etc. 

• Cost of special drawings, cost of special layout designs, patents, patterns, cost of models,

surveyors fees, Excise duty, Royalty on production cost of ractifying defective work. Utility of such

expenses is exhausted on completion of the job.

Indirect Cost

It is that portion of the total cost, which cannot be identified and charged direct to the product 

It has to be allocated, apportioned and absorbed over the units manufactured on a suitable basis.

Indirect Material

• It is the cost of material other than direct material which cannot be charged to the product directly

• It can not be treated as part of the product, 

• It is also known as expenses materials 

• It is the material which cannot be allocated to the product but which can be apportioned to the cost

units. Examples are as follows:

1. Lubricants, cotton waste, Grease, Oil, stationery etc.

2. Small tools for general use.

3. Some minor items which as thread in dressmaking, cost of nails in shoe making etc.

Indirect Labour.

• It is the amount of wages paid to those workers who are not engaged on the manufacturing line, for

example, wages of workers in administration department, watch and ward department, watch and

ward department, sales department, general supervision.

Indirect Expenses

• It is the amount of expenses which is not chargeable to the product directly 

• It is the cost of giving service to the production department 

• It includes factory expenses, administrative expenses, selling and distribution expenses etc.

OVERHEADS OR ON COST OR BURDEN OR SUPPLEMENTARY COST

Aggregate of indirect cost is referred to as overheads. It arises as a result of overall operation of a

business. According to Weldon over-head means ‘the cost of indirect material, indirect labour and

such other expenses, including services as cannot conveniently be charged direct to specific cost

units. It includes all manufacturing and non-manufacturing supplies and services.

This cost cannot be associated with a particular product. The principal feature of overheads is the

lack of direct tractability to individual product. It remains relatively constant from period to period.

The amount of overheads is not directly chargeable i.e. it had to be properly allocated, apportioned

and absorbed on some equitable basis.

Classification of Overheads

1.Factory Overheads: 

• It is the aggregate of all the factory expenses incurred in connection with manufacture of a

product 

• These are incurred in connection with running of factory 

• It includes the items of expenses viz., factory salary, work manager’s salary, factory repairs, rent of

factory premises, factory lighting, lubricants, factory power, drawing office salary, haulage (cost of

internal transport) depreciation of plant and machinery unproductive wages, estimation expenses,

royalties loose tools w/off, material handling charges, time office salaries, counting house salaries

etc.

2. Administrative Overheads or Office Overheads: 

• It is the aggregate of all the expenses as regards administration 

• It is the cost of office service or decision making 

• It consists of the following expenses: Staff salaries, office premises, office conveyance, printing and

stationery and repairs and depreciation of office premises and furniture etc.

3. Selling and Distribution Overheads: 

• It is the aggregate of all the expenses incurred in connection with sales and distribution of finished

product and services 

• It is the cost of sales and distribution services.

• Selling expenses are such expenses, which are incurred in acquiring and retaining customers. It

includes the following expenses:

a) Advertisement b) Show room expenses c) Traveling expenses 

d) Commission to agents) Salaries of Sales office f) Cost of catalogues 

g) Discounts allowed h) Bad debts written off i) Commission on sales 

j) Rent of Sales Room

4.Distribution expenses 

• It includes all those expenses, which are incurred in connection with making the goods available to

customers. These expenses include the following:

a) Packing charges b) Loading charges c) Carriage on sales d) Rent of warehouse e) Insurance and

lighting of warehouse f) Insurance of delivery van g) Expenses on delivery van h) Salaries of

Godownkeeper, drivers and packing staff.

DETERMINATION OF TOTAL COST

Cost of product is determined as per cost attach concept. Total cost of a product consists of various

elements of cost, which have the quality of coherence. All the elements of cost can be grouped and

regrouped. Grouping and re-grouping of the various elements of costs leads to significant divisions of

cost. 

NON-COST ITEMS

Non-cost items are those items, which do not form part of cost of a product. Such items should not

be considered while ascertaining cost of a product. These are items included in profit and loss A/c as

per principles of Financial Accountancy but not related to product. For example, Income-tax paid,

provision for Income-tax, interest on capital, interest on loan, profit on sale of fixed assets, loss on

sale of fixed assets, transfer fees received, transfer to reserves, any other appropriation of profit,

commission to Managing Director or Partners, capital loss, donations, capital expenditure, discount

on shares and debentures, Goodwill written off, Preliminary expenses written off, brokerage, pure

financial expenses or losses and expenses not related to th business, wealth tax, bonus to directors

and employees, if it is based on profit, expenses of raising capital, penalties and fines.

COST SHEET

For determination of total cost of production a statement showing the various elements of cost is

prepared. This statement is called as a ‘statement of cost’ or ‘cost sheet.’ Cost sheet is a statement,

which provides for the assembly of the detailed cost of the total cost of job operation or order. It

brings out the composition of total cost in a logical order, under proper classifications and sub-

divisions. The period covered by the cost sheet may be a week, a month or so. Separate columns are

provided to show the total cost and cost per unit. In case of multiple products a separate cost sheet

may be prepared for each product. Alternatively, separate columns of total cost and unit cost may be

provided for each product in the same cost sheet. A cost sheet is prepared under output or unit

costing method.

Purposes of cost sheet

Cost sheet serves the following purposes: 

1. It gives the break up of total cost under different elements.

2. It shows total cost as well as cost per unit

3. It helps comparison with previous years.

4. It facilitates preparation of tenders or quotations

5. It enables the management to fix up selling price

6. It controls cost.

DIVISIONS OF COST

Prime Cost:It comprises of all direct materials, direct labour and direct expenses. It is also known as

flat cost.

Prime Cost = Direct Materials + Direct Labour + Direct Expenses.

Works Cost:It is also known as factory cost or cost of manufacture. It is the cost of manufacturing an

article. It includes prime cast and factory expenses.

Works Cost = Prime Cost + Factory Overheads

Cost of Production:It represents factory cost plus administrative expenses

Cost of Production = Factory Cost + Administrative expenses

Total Cost:It represents cost of production plus selling & distribution expenses

Total Cost = Cost of production + Selling & distribution - expenses

Selling Price: It is the price, which includes total cost plus margin of profit or minus loss, if any.

Selling Price = Total Cost + Profit (-Loss)

TREATMENT OF CERTAIN ITEMS

i) Raw Materials

For calculation of raw material consumed, following formula may be used:

Rs.

Stock of Raw Materials XX

Add Purchases XX

XX

Less Closing Stock of Raw Materials XX

Cost of Material Consumed XX

ii) Work in Progress

It represents incomplete units at the end of a given period. The work in progress is valued at prime

cost or at factory cost.

At Prime Cost

In such a case opening and closing work in progress is taken into consideration in cost sheet while

calculating prime cost.

Rs.

Direct Materials XX

Add Direct Wages XX

Add Other Direct Expenses XX

Add Opening Work in Progress XX

XX

Less Closing work in Progress XX

Prime Cost XX

At Factory Cost

Direct Materials XX

Direct Labour XX

Other Direct Expenses XX

Prime Cost XX

Add Factory Overheads XX

Add Opening Work in Progress XX

XX

Less Closing Work in Progress XX

Factory Cost XX

iii) Carriage Inward

It is the carriage on purchase of materials, which should be added to the cost of materials purchased.

iv) Carriage Outward

It is the carriage on sales, which should be treated as selling and distribution overhead.

v) Defective Materials

If defective material is returned to supplier, the cost of material consumed should be reduced by the

value of such material. If it is sold, it should be reduced.

vi) Scrap

If wastage or residual of material scrap or defective product is sold as scrap, the value realized

should be deducted from factory overheads.

vii) By-Product

Realisable value of by-product is deducted from factory overheads.

viii) Defective Product

If defective product is rectified by incurring extra expenditure, it should be included in factory cost if

it is caused by normal reasons. If it is caused by abnormal reasons, the rectifying cost is transferred

to costing P & L A/c.

COST ACCOUNTING STANDARDS (CAS-4)

Name of the Manufacturer:

Address of the Manufacturer:

Registration No. Of Manufacturer:

Description of product captivity consumed:

Excise Tariff Heading: 

Statement of Cost of Production of ____________ manufactured / to be manufactured during the period

_____________. 

Qty.

Q1 Quantity Produced (Unit of Measure)

Q2 Quantity Despatched (Unit of Measure)

Particulars Total Cost

(Rs) Cost/Unit

(Rs)

1. Material Consumed

2. Direct Wages and Salaries

3. Direct Expenses

4. Works Overheads

5. Quality Control Cost

6. Research & Development Cost

7. Administrative Overheads (relating to production activity)

8. Total (1 to 7)

9. Add: Opening stock of Work-in-progress

10. Less: Closing stock of Work-in-progress

11. Total (8+9-10)

12. Less: Credit for Recoveries / Scrap / By-products / Misc.income

13. Packing cost

14. Cost of production (11 – 12 + 13)

15. Add: Inputs received free of cost

16. Add: Amortised cost of Moulds, Tools, Dies & Patterns etc., received free of cost

17. Cost of Production fro goods produced for captive consumption (14 + 15 + 16)

18. Add: Opening stock of finished goods

19. Less: Closing stock of finished goods

20. Cost of production for goods despatched (17 + 18 + 19)

Seal & Signature of Company’s Authorised Representative 

I / We, have verified above data on test check basis with reference to the books of account., cost

accounting records and other records. Based on the information and explanations given to me / us.,

and on the basis of generally accepted cost accounting principles and practices followed by the

Industry. I / We certify that the above cost data reflect true and fair view of the cost of production 

Date:------------------- Seal & Signature of Cost Accountant

Place:------------------ Membership No.

COSTING FOR TATA MOTORS

The Passenger Car division was born out of a vision to offer the Indian customer all the comfort of a

big car, at the price of a small car. The Indica was formally launched in 1998 & has rewritten the

rules of the Indian car industry ever since then. The latest addition to the Tata Motors family after the

launch of Indigo which is designed to deliver never-before levels in luxury, safety, power and comfort

on Indian roads is the New Indica V2. Refreshingly different, with a sporty new look, stylish interiors,

and more. The Indigo Marina story started two years back with the launch of the luxury sedan from

Tata Motors, the Tata Indigo. There were however, a select group of people who wanted everything

that came with the Indigo plus a little more space. So, we developed the Indigo Marina. A car that

has the luxury of a sedan and the utility and convenience of a multi-utility vehicle. A car that does

not compromise on power, safety and luxury. A car that has enough space to carry everyone and

everything you've ever loved, right by your side, on every drive.

Established in Established in

COST SHEET

Cost Sheet for Tata Motors for the year 2003-2004

Rs./ Crores

Direct Materials

(a) Spare parts & accessories for sale 253.55

(b) Bodies & trailers for mounting on chassis 214.43 467.98

Direct Labour 323.00

Direct Expense 2270.30

Prime Cost 3061.28

Factory Overheads

Consumption of Raw Materials 7873.41

Processing Charges 388.59

Stores, spare parts & tools consumed 236.73

Freight, transportation, port charges 185.47

Repairs to plant, machinery 25.62

Power & Fuel 214.52

Insurance 21.44

Lease Rentals in respect of Plant & Machinery 8.84

Depreciation 382.60

Work Cost(Gross) 9337.22

Opening WIP 793.91

Less: Closing WIP 651.93 141.98

Works Cost(Net) 9479.20 12540.48

Administrative Overheads

Salaries 323.99

Repairs to building 20.37

Rent 9.37

Rates & Taxes 22.16

Total Cost 375.89 12916.37

Add: Opening Finished Goods

Add: Purchase of Finished Goods

Less: Finished Goods

Cost of production of Saleable units 12916.37

Selling and Distribution Expenses

Publicity 123.60

Incentive/Commission to dealers 120.57

Commission & Brokerage on sales 25.92

Cost of Sales 270.09 13186.46

Profit 2022.28

Sales 15208.74

Assumptions:

1. The salaries & wages are divided in the ratio of 1:1 such that 323 crores is allocated to the factory

direct labour & 323.99 crores is allocated to the office administration.

2. Freight & stores consumed are factory expenses

3. Repairs to building are an administrative expense as the building is used for the office.

4. Rent, Rates & Taxes are administration expenses.

Following items are excluded from the cost sheet

• Product development cost is a capital expenditure hence not considered.

• Interest being a financial expense is not considered.

• Extraordinary items like write back of provision for contingencies, provision for diminution in vale of

investment & employee separation cost not considered.

• Provision for tax, investment allowance & the other appropriations in profits are not considered in

arriving at cost.

• Superannuation, gratuity & contribution to provident fund.

• Workmen & staff welfare expenses, which includes provisions for employee benefit schemes, is not

considered.

• Provision for Wealth Tax.

• Excess debits/ short credits in respect of previous years.

• Loss on assets sold/scrapped/written off.

• Provision for doubtful sundry debts, bad debts written off, warranty expenses & securitisation

expenses for hire purchase contracts.

COSTING OF HINDUSTAN PETROLEUM (HPCL)

Hindustan Petroleum Corporation Limited (HPCL) is the result of a successful convergence of four

established companies. Today the second largest integrated oil refining and marketing company in

India, HPCL was born of the merger of ESSO, Lube India Ltd, Caltex Oil Refining India Ltd and Kosan

Gas Company Ltd. 

The Company was first incorporated as Standard Vacuum Refining Company of India Limited, on July

5, 1952, and later named ESSO India Limited, on March 31, 1962. On July 12, 1974, when Esso and

Lube India were nationalised, the Company was renamed Hindustan Petroleum Corporation Limited

with effect from July 15, 1974. The undertakings after nationalisation were then vested in HPCL. The

Government of India also nationalised the Caltex undertakings in the year 1976, which were

subsequently merged with HPCL in 1978. In the following year, the undertakings of Kosan Gas

Company Ltd, the concessionaires of HPCL in the domestic LPG market, were merged with HPCL.

Thus, the various amalgamations, at different points in time, have given rise to HPCL that has ever

since been growing from strength to strength. 

HPCL had a humble beginning in 1974 with one refinery at Mumbai that had a refining capacity of 3.5

million metric tonnes per annum (MMTPA). The Lube oil refinery at Mumbai stood around 165000

Tonnes per annum. The sales turnover in that year was only Rs. 3.67 billion, and the net profit Rs. 58

million. But over the years, the Corporation has made judicious use of its assets to achieve

tremendous growth. Dedicated and well - experienced manpower, strategically located refineries at

Mumbai and Visakh and a widespread marketing network have enabled the company to carve a

niche in the Indian oil industry today.

Vision

"To be a leading world class company in hydrocarbons and energy related sectors with a global

presence.

Mission 

HPCL, along with its joint ventures, will be a fully integrated company in the hydrocarbons sector of

exploration and production, refining and marketing;

focussing on enhancement of productivity, quality and profitability; caring for customers and

employees; caring for environment protection and cultural heritage.

It will also attain scale dimensions by diversifying into other energy related fields and by taking up

transnational operations."

COST SHEET

Cost Sheet for Hindustan Petroleum Corporation Ltd for the year 2003-2004

Rs./ Crores

R.M Consumed 15,017.04

Direct Labour (See Assumption 1) 280.055

Direct Expense 

-Excise Duties 5993.47

Prime Cost 21290.565

Factory Overheads

Packages Consumed 79.15

Transshipping Expenses 1228.97

Duties Applicable to Products 317.61

Repairs and maintenance to Plant 165.68

Rent (See Assumption 3) 28.65

Repair and maintenance to other assets (See Assumption 2) 1.633

Electricity and Water 94.93

Power and Fuel 9.17

Rates and Taxes 21.20

Equipment Hire Charges 0.30

Consumption of stores, spares and chemicals 71.08

Depreciation: 

-Transport Equipment (See Assumption 4) 2.335

-Roads and Culverts 7.16

-Leasehold Property 2.45

-Railway siding and Rolling stock 12.42

-Plant and Machinery 536.24 560.605 2578.978

Work Cost (Gross) 23869.543

Opening WIP 212.67

Less: Closing WIP 197.68 14.99

Works Cost (Net) 23884.533

Administrative Overheads

Security Charges 16.67

Depreciation 

- Building 17.25

-Furniture, fixtures and equipments 26.39 43.68

Office appliances--- Printing & Stationary 7.69

Rent (See Assumption 3) 28.65

Repair and maintenance to building 11.7

Repair and maintenance to other assets (See Assumption 2) 1.634

Insurance 40.08

Consultancy and Technical charges 37.26

Sundry Expenses and Charges 163.04

Office Salaries (See Assumption 1) 280.055 630.459

Total Cost 24514.989

Add: Opening Finished Goods 3777.2

Add: Purchase of Finished Goods 30583.9 34361.1

Less: Finished Goods -4149.69

Cost of production of Saleable units 54726.399

Selling and Distribution Expenses

Traveling and Conveyance 55.97

Repair and maintenance to other assets (See Assumption 2) 1.633

Depreciation on transport equipment (See Assumption 4) 2.335

Advertising & Publicity 81.45 141.388

Cost of Sales 54867.787

Profit 2643.343

Sales 57511.13

Assumptions

1 A bifurcation between factory wages and office salaries has not been given. However the annual

report says that HPCL has 11088 employees of which 3594 are management employees and 7494

are non-management employees. Let us assume this to be the distribution of office and factory staff.

However, the management employees have higher salaries. Thus, I have divided Wages, Salaries and

Bonus equally between Direct Labour and Administrative overheads.

2 Repairs and Maintenance to other assets has been equally divided between Factory overheads,

Administrative overheads and Selling and Distribution overheads since the assets have not been

mentioned.

3 Rent is equally distributed as Factory rent and Office rent.

4 We assume that Transport equipment is used for both Factory and Selling and Distribution

purposes. Thus depreciation on transport equipment is equally divided between Factory overheads

and Selling and Distribution overheads.