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How to Prepare a Cost Statement

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A cost statement or cost sheet is a breakdown of all costs incurred, which is comprised of direct and indirect expenses. While the statement can be prepared to calculate the cost of any item from attending a university to a development project, it is most commonly used for goods. The cost statement is the largest expense on the income statement and shows the cost of the product. The cost for retailers and wholesalers is the amount paid during the period. The process for calculating the cost for manufacturers is more complex and has many components: direct material, direct labor, factory and administration overheads, and selling and distribution overheads.

Add opening balance of the stock of direct materials, purchases during the accounting period, and any other purchase expenses. From that amount subtract the closing balance of the stock of direct materials. The result is the cost of direct materials used.

Add salaries paid to labor and any other direct charges to the cost of direct materials used. This is the prime cost.

Compile factory overheads including rent, utilities, indirect labor, indirect material, insurance, real estate taxes and depreciation.

Sum up prime cost, factory overheads, and opening balance of work-in-progress at the beginning of the accounting period. Subtract the closing balance of the work-in-progress, and the result is the cost of good manufactured.

Add the opening stock of the finished inventory to the cost of goods manufactured to give the cost of goods available for sale.

Subtract the closing balance of the finished inventory at the end of the accounting period from the cost of goods available for sale. This is the cost of goods sold.

List selling and distribution overheads, like salary of sales personnel, travel expenses, advertisement, and sales tax. Sum the overheads with the cost of goods sold, resulting in the cost of sales or the total cost at the end of the cost statement.

Tip

Use accounting software, which automatically generate cost statements.

Warning

Do not include expenses not related to the product like donations, or loss by fire. Be careful not to include expenses after profit, like income tax, or financial expenses, like interest payments or dividends.

About the Author

Nida Rasheed has been writing for online businesses since 2008. She specializes in topics such as health, fitness, pet care, travel and home improvement. Rasheed studied social sciences at Lahore University of Management Sciences.

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