A report of all the costs associated with the production, administrative, financing, selling and distribution of a product is called as cost sheet. Preparation of a cost sheet is done to calculate the margin or profit of a product. Also, it is used as a basis while setting the price of similar products in the future. Cost sheet should be prepared by every business before it starts with the operations. The importance of cost sheet is explained as follows.
Determining Selling Price
Cost sheet helps in fixing the selling price of a product or service. It is essential to prepare a cost sheet for determining the individual costs which lead to determining the cost of the product or service. Once you know your total cost, add the margin or the profit percentage to the total cost in order to arrive at the selling price.
Facilitates the Managerial Decisions
Fixing of selling price is aided by the cost sheet and so cost sheet help managers in making management decisions such as whether to produce or buy a component, what prices of goods can be quoted in the tender, whether to retain or replace an existing machine, how to reduce costs, etc.
Disclosure of Profitable and Unprofitable Activities
Since cost accounting calculates individually the cost, selling price, and profitability of the product, the separation of profitable and unprofitable activities or items becomes easy. So if the cost of any product is exceeding than the revenue, then it helps the decision-making to identify and make decisions whether they need to continue with the product or not.
Find Out Exact Cause of Change in Profit
Cost sheet keeps a track of all your cost. As a result, you are able to identify the cause behind a change in profit. If the wages of labor is increased, then your profits will decrease. Similarly, if the price of raw materials is reduced, your profits will increase. Therefore, you can determine which cost element has led to change in profits and keep a check on all your business expense. Moreover, cost sheet can be used to determine the profitability of each department within your organization. This helps you to know which department is performing better and what needs to be done to improve the profitability of other departments.
Preparation of Budget
Companies can prepare a budget with the help of cost sheet. You can prepare the budget by using the current or previous year’s data. Based on your existing cost sheet, you can make estimates of your cost for the next financial year. It helps you to be prepared and make the necessary arrangement of funds for costs of the next financial year. For example, if you expect factory overheads to increase by 10%, then accordingly you can make the arrangement of funds to cater to the increase in the cost of factory overheads.
Cost sheet can prove to be extremely beneficial in taking future business decisions. Now that you know the importance of cost sheet, it is advisable that you contact a professional accountant who will help you understand the implications of different cost on your business and prepare a cost sheet in order to enable you to make right business decisions.