Running a business successfully requires a lot of financial planning and effective financial management. A cost sheet can be a way of being aware of all the costs incurred by us on different things while running a factory or facility. From this knowledge, we can easily think of cost cutting ideas for companies and institutions. So, you must have some idea as to why the preparation of a cost sheet is essential. The format is standard and we are expected to follow it. In this article, you will learn how to prepare a cost sheet. Factors to be Considered Calculation of Materials Consumed The aim of preparing a cost sheet is to show the various types of costs incurred by the factory in the course of its operations. This document consists of particulars and amount columns. In the particular columns, you show the different kinds of expenses of the company. Calculating the materials consumed is the first step. The materials consumed are calculated by adding the purchased raw material cost and carriage inward to the opening stock of raw materials, and then subtracting the closing stock of raw materials from this total. Materials Consumed = (Opening stock of raw materials + purchase of raw material + carriage inward) - (closing stock of raw material). Calculation of Prime Cost Prime cost is calculated by adding direct wages and direct expenses to the materials consumed total. Direct wages are the wages given to workers in the factory and direct expenses are the expenses incurred while making the finished goods. Prime Cost = Materials consumed + direct wages + direct expenses. Calculation of Factory cost The next step is the calculation of factory cost. The factory cost is calculated by adding the factory overheads to the prime cost. The factory overheads are the expenses related to the factory and are in no way related to administration and marketing expenses. These factory overheads can include lighting costs, salaries for workers, machinery cost, rent for factory, insurance for factory, power costs, fuel cost, etc. Overhead is actually the sum total of indirect material, indirect wages, and indirect expenses. Factory Cost = Prime cost + sum of all factory overheads. Calculation of Cost of Production The cost of production can be calculated by adding the office and administration overheads to the factory cost. Now, the office and administration overheads are the salaries of managers, director's fees, office light expenses, stationery expenses, building maintenance expenses, etc. Cost of Production = Factory cost + office and administration overheads. Once this cost of production is calculated, you need to add the opening stock of finished goods and then subtract the closing stock of finished goods before we calculate the cost of sales. Calculation of Cost of Sales or Total Cost The total cost can be calculated by adding the selling and distribution overheads to the cost of production. These selling and distribution overheads are mainly the expenses on promotion and marketing related activities. These can include postage expenses, transportation expenses, advertising expenses, marketing expenses, and carriage outward. Total Cost = Cost of production + selling and distribution overheads. Calculation of Total Sales The total sales can be calculated by adding the total cost and the net profit of the firm. This is the last part of the cost sheet. Total Sales = Total cost + net profit. This explanation on how to prepare a cost sheet gave us knowledge of all items of cost sheets and how they are used to calculate the total cost. Only monetary aspects are considered in the preparation. So, try preparing the same yourself and test your accounting knowledge and skills. Good luck!