Prepared by SM Nahidul Islam 1

Dept. of Finance & Banking

1. Definition of cost sheet & state the purposes of cost sheet

Answer: A cost sheet is a statement of cost incurred, or to be incurred, for producing a given volume of
output or for rendering services. Preparation of a cost sheet helps cost control and pricing decisions. It may
be prepared based on absorption costing and marginal costing techniques.

The main purposes or advantages of cost sheet are:

1. It discloses the total cost and the cost per unit of the units produced during the given period.
2. It enables a manufacture to keep a close watch and control over the cost of production.
3. It acts as guide to the manufacturer and helps him in formulating a definite useful production policy.
4. It helps in fixing up the selling price more accurately.
5. It helps the businessman to minimize the cost of production when there is a cut throat competition.
6. It helps the businessman to submit quotations with reasonable degree of accuracy against tenders for
the supply of goods.

2. Describe the classification of costs

Answer: Costs can be classified into the following different types -

1. Historical cost: It is measured by actual cash payments or their equivalent at the time of outlay for
acquiring assets, or goods and services.
2. Estimated cost: It is a predetermined cost.
3. Standard cost: Most scientifically predetermined cost.
4. Total cost: The sum of all costs attributable to a given volume under consideration.
5. Average cost: It is the unit cost which is computed by dividing the total cost by the volume involved.
6. Marginal cost: Measured by the change in cost due to change in output by one unit.
7. Differential cost: Change in total costs at a particular level of activity with respect to another. This
is also known as incremental cost.
8. Replacement cost: This is the current cost of replacing an asset.
9. Opportunity cost: It is the measurable advantage foregone as a result of the rejection of alternative
uses of resources, whether of materials, labour or facilities.
10. Imputed cost: It is a hypothetical cost and does not involve actual cash outlay and, as a
consequence, does not appear in the financial records.
11. Sunk cost: It represents historical cost which is irrecoverable in a given situation.
12. Discretionary costs: They are fixed costs that arise from periodic, usually yearly, appropriation
decisions that directly reflect top management policies.
13. Controllable costs: Costs which can be influenced by the action of an individual in an enterprise
within a given time span are called controllable costs.
14. Relevant costs: Costs appropriate to aiding the making of specific, management decisions. These are
expected future costs that will differ under alternatives.
15. Policy costs: Costs incurred as a result of taking a particular policy decision are called policy costs.

Islamic University, Kustia

 Prepared by SM Nahidul Islam 2
Dept. of Finance & Banking

3. Differences between a Cost Centre and a Cost Unit

Answer: The differences between cost Centre and cost unit are given below:

Cost Centre Cost Unit

A cost Centre is the smallest segment or activity or
area of responsibility for which costs are ascertained.
A cost centre is one segment of the total organization.
A cost centre helps to determine costs by location,
person, etc.
A cost centre is devised before applying the cost unit.
A concern which even produces only one product or
renders only one service, may have several cost
centres
A cost unit is a quantitative unit of product or
service in relation to which costs are expressed and
ascertained
A cost unit is the unit of expressing cost and is, as
such, a part related to the production or service.
Cost unit is used for the sub-division of costs which
may be attributed to the products or services.
Application of cost units arise after the functions of
devising cost centres are over.
A cost unit is assigned to one distinct product or
service.

4. Describe the Elements of Cost

Answer: Following are the four broad elements of cost:

1. Material: The substance from which a product is made is known as material. It may be in a raw or a
manufactured state. It can be direct as well as indirect.
a. Direct Material: Direct materials are the materials that can be specifically identified with the
product.
b. Indirect Material: Indirect materials costs are usually variable because materials are based on the
level of production.

2. Labor: For conversion of materials into finished goods, human effort is needed and such human effort is
called labor. Labor can be direct as well as indirect.
a. Direct Labor: The labor which actively and directly takes part in the production of a particular
commodity is called direct labor.
b. Indirect Labor: The labor employed for the purpose of carrying out tasks incidental to goods
produced or services provided, is indirect labor.
3. Expenses: Expenses may be direct or indirect.
a. Direct Expenses: These are the expenses that can be directly, conveniently and wholly allocated to
specific cost centers or cost units.
b. Indirect Expenses: These are the expenses that cannot be directly, conveniently and wholly
allocated to cost centers or cost units.
4. Overhead: The term overhead includes indirect material, indirect labor and indirect expenses. Thus, all
indirect costs are overheads. Overheads may be incurred in a factory or office or selling and distribution
divisions. Thus, overheads may be of three types:
a. Factory Overheads
b. Office and Administration Overheads
c. Selling and Distribution Overheads

Islamic University, Kustia