# The Cost Sheet — Architecture
A Cost Sheet is a statement that presents the cost of a product / service in a logical, step-wise manner. It is built on the functional classification of cost: Prime → Factory → Admin → Selling & Distribution → R&D.
## The Four Build-up Heads
A standard cost sheet has four progressive totals, each adding a new layer of cost:
```
PRIME COST → COST OF PRODUCTION → COST OF GOODS SOLD → SALES
(Direct (+ Factory OH + (+ Selling & (+ Profit)
costs) Admin OH) Distribution OH)
```
Each head answers a specific question:
| Head | Question Answered |
|---|---|
| Prime Cost | What did the direct resources cost? |
| Cost of Production | What did it cost to make the finished goods (factory + office)? |
| Cost of Goods Sold | What did it cost to make and sell the goods? |
| Sales | What is the selling value (COGS + profit)? |
## 1. Prime Cost — the Direct Layer
Prime Cost = Direct Material + Direct Labour + Direct Expenses
These are the costs that can be directly traced to a unit of output.
### Direct Material
Material that physically becomes part of the product (or is consumed in producing it) and can be conveniently identified per unit.
Direct Material Consumed = Opening Stock + Purchases + Carriage Inward − Closing Stock − Returns
### Direct Labour (Direct Wages)
Wages paid to workers directly engaged in converting raw material into finished goods (e.g., machine operator, assembler, tailor).
### Direct Expenses (also called Chargeable Expenses)
Expenses other than material & labour that can be specifically traced to a job/product. Examples:
- Royalty paid on units produced
- Hire charges of a special machine taken for a particular job
- Cost of special drawings / designs for a specific job
## Why Prime Cost Matters
- It is the building block of every cost sheet.
- Combined with Manufacturing Overhead (= Indirect Material + Indirect Labour + Indirect Expenses incurred in factory), it gives the Conversion Cost.
$$\text{Conversion Cost} = \text{Direct Labour} + \text{Manufacturing Overhead}$$
- Visual relationship:
```
Direct Direct Manufacturing
Material Labour Overhead
└──── Prime Cost ────┘
└─── Conversion Cost ───┘
```
## Functional Classification — Drives the Sheet
```
PRIME PRODUCTION ADMIN SELLING & R&D
COST / FACTORY OH DISTRIBUTION COST
OH OH
```
Each functional bucket is added in sequence to move from Prime Cost up to Sales.
## Skeleton Cost Sheet (commit to memory)
| Particulars | Amount (₹) |
|---|---|
| Opening Stock of Raw Material | xxx |
| Add: Purchases of Raw Material | xxx |
| Add: Carriage Inward | xxx |
| Less: Closing Stock of Raw Material | (xxx) |
| Direct Material Consumed | xxx |
| Add: Direct Labour | xxx |
| Add: Direct Expenses | xxx |
| PRIME COST | xxx |
| Add: Factory / Production Overhead | xxx |
| Add: Opening WIP − Closing WIP | xxx |
| Works / Factory Cost | xxx |
| Add: Administration Overhead (Production related) | xxx |
| COST OF PRODUCTION | xxx |
| Add: Opening FG − Closing FG | xxx |
| COST OF GOODS SOLD | xxx |
| Add: Selling & Distribution Overhead | xxx |
| COST OF SALES | xxx |
| Add: Profit | xxx |
| SALES | xxx |
> Build the sheet downwards in this exact order — do not jump ahead, and never miss the WIP / FG adjustments.