Prepare a Methodical Cost Sheet

There may be many questions in the minds of many businessmen who have their own factories, prominent among them being, how to prepare a cost sheet. Well, this article will tell you all about it.

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.

Understanding Different Types of Savings Accounts

If you are looking for information on the types of savings accounts offered by banks in the US, this article will be a helpful read. By the time you are through with this write-up, you’ll know which type of savings account will be ideally suited for your requirements.

Banks as financial institutions have been around since ever and the primary service they have provided over the years, besides lending money is the management of savings accounts for their customers. The capital base of a bank is strengthened by the amount of deposits that its customers invest in it. These deposits mainly come in the form of savings accounts. In this Buzzle article, you’ll be introduced to the different types of savings accounts that you could open with banks in USA. Before we dive into all that, let me define what are savings accounts and how they serve the interests of account holders and the banks offering them.

What is a Savings Account?
A savings account is created through a contractual agreement of a customer with a bank or credit union, whereby, the financial institution offers an interest on the money deposited, along with other services. Depending on the nature of the account, there may or may not be a restriction on the minimum balance that needs to be maintained by an account holder. The interest offered is of a compounding nature, being fractionally deposited to the account over time.

Again depending on the nature of the account, there may be restrictions on the number of free cash withdrawals per month. A checkbook usage facility is also an optional feature that you may not find with all savings accounts. When there is no limit on minimal balance requirements, the interest rate offered by the bank is low. On the other hand, savings accounts with high interest rates require that you strictly maintain a minimum balance. Most savings accounts come with a debit card, that lets you withdraw money in cash from automatic teller machines (ATMs). Obviously, there is no limit on the number of deposits you may make in the account. Only withdrawals beyond a limit, may be charged. Majority of savings account deposits are protected by the FDIC (Federal Deposit Insurance Corporation), a federal government body, which was created for the purpose of safeguarding deposits of the US citizens.

Understanding Different Types of Savings Accounts
Although the range of services offered along with the account may vary from bank to bank, the three primary kinds of savings accounts offered by banks are the following.

Basic Savings Account
Also known as regular savings accounts or passbook accounts, these come with no limit on the number of withdrawals per month. Geared to be used for regular expenses, these accounts come with a low minimum balance demand. Some are even deemed to be zero balance accounts with no minimum balance requirement whatsoever. They are equipped with a debit card and checkbook facility. Interest rates offered on the deposit are quite low with most being less than 1%.

Money Market Account
Offering a higher interest rate, money market accounts come with a substantial amount of restrictions. The minimum balance expected to be maintained in such an account is substantially high, compared to basic accounts, due to the high promised interest rate. Only a fixed number of withdrawals are allowed for free, after which they are charged. The banks offering such accounts primarily invest in securities and promise high returns.

Certificate of Deposit Account
A third option is a certificate of deposit account, which locks in the account holder’s deposit for a fixed period of time, after which it’s returned with interest. These accounts offer the highest interest rates and penalize all withdrawals that are made before the maturity of the certificate of deposit. It is a classic time deposit with lock in periods ranging from 1 month to more than 5 years.

If you are looking for an expense account that you plan to use for shopping, paying your bills and handling other such expenses, a basic savings account is what you are looking for. In case you are looking for a bank account that earns you a decent interest rate and you don’t intent to use it as an expense account for regular transactions, a money market account is what you need. If you are looking for still higher returns, a certificate of deposit account is the ideal choice. Evaluate your exact requirements and choose the option which is most conducive for your plans.

Stages of a Business Cycle

Like everything in this world, business too has to follow a life cycle. Time happens to be one of the major factors that plays an important role in the life cycle of a business.

With the passage of time, a business enters into different phases of its life. Along with time, other factors too play an important role in the life cycle of a business. A major concern for companies is to stay in the market, create business opportunities, and survive threats from competitors. To capture the market, a business has to go through rigorous courses and policies that help it to gain popularity. With the introduction of a business in the market, it becomes essential to implement proper planning for its growth and development.
The Business Cycle
Every business has its own set of guidelines and processes designed for its efficient functioning. However, in general, any business is affected by various factors like demand and supply, consumer confidence, availability of capital, etc. These factors affect the business in such a way that it experiences a periodic rise and fall. There are basically four different phases in the life cycle of any business, which are:

Growth
» This is the initial phase that a business experiences in the market. Many policies have to be framed in this phase. It is also referred to as the expansion phase, as the business tries to establish its niche in the market. It happens to be the time when business owners start establishing their brand identity and generate brand loyalty within their customer base using intelligent marketing practices.

» This stage is marked by a rise in consumer demand and a consequent requirement of increased inputs in terms of production, manufacturing, and general operations to keep up with the rising sales and continued growth. The growth phase, being marked by increased sales, shows a rise in profit margins and firmly establishes the brand name of the business in the market.

» The company has to work on its strength and look out for the potential threat of competitors. The focus of this stage is to maintain the core customer group and build trust and goodwill amongst the customers.

A few common features of this phase include:
– Increasing demand
– Increased income
– High competition
– High advertising
– New policies
– Creation of customer loyalty

Peak
» After the introductory phase of the business gets over, it enters its second crucial juncture, the ‘peak’ phase. In this stage, a business reaches its maturity point and is well established in the market. Sales reach their apex and not much effort is required to increase turnover. The brand identity and brand image of the business are well established at this stage. The customer base, investors, and other important business networks are well laid at this point.

» However, intensive marketing is a must to enhance the overall market position, or at least maintain the current market position. This is the phase where the company would want to branch out into other ventures and dabble with product innovation. This is the business stage where the profit margins are fairly stable.

Some prominent features of this phase include:
– High demand
– High supply
– High income
– High market share
– Less advertising
– Strong brand image

Recession
» After enjoying maturity for sometime, there comes a phase when the market sales of a business decline. There can be a lot of factors responsible for the degradation of the business. It can be government policies, new strong competitors, labor problems or any other unfavorable condition that can bring about a drastic change in the economic stability of the business.

» Recession becomes a stage where the company struggles to keep its stand in the market. This stage shows a loss in market share and the business is said to be in a ‘phase of recession’.

Related features of this stage are:
– Decrease in demand
– Loss in sales
– Low income
– Loss of market share
– High competition

Trough
» In a business cycle, the trough stage is exactly opposite of the peak stage. In this stage, the business reaches its lowest point in terms of market share and sales. During a trough stage, prices and profits start falling. There is less selling, buying, employment and production. In this stage, consumer demand and confidence level remain low. High competition in the market leads to the downfall of business. If the trough phase becomes severe then it is known as depression.

Common related features include:
– Lowest income
– Loss in customer confidence
– High unemployment
– Cost cutting and reduction
– Fall in market share

The last phase (Trough) seems like a vivid description of the end of a business. But this may not happen in most cases, as businesses often frame new policies and start expansion policies to enhance growth. When businesses frame such policies, this stage becomes the recovery stage, which, if successful, takes the company back to the growth stage, thus completing the cycle. Proper planning and decision-making is essential to make the business prosper again.

These four stages of a business cycle are experienced by every business, big or small, though not necessarily in the same order. Sometimes the business flourishes and gains maximum profits, while at times the business is on the verge of a complete meltdown. It is the attitude and the positive perspective of successful businessmen that keeps every business going through the ups and downs, yet always aiming for the pinnacle of success.

Basic Accounting Concepts

Accounting refers to the systematic recording of business transactions and preparation of statements relating to assets, liabilities and functioning results of a business. Accounting has to follow certain fundamental rules that form the basic accounting concepts and principles.

The main purpose of financial accounting is to provide necessary economic information required for decision-making in a business. Financial accounting follows certain rules and guidelines to prepare reports on the financial standing of an entity. These rules and guidelines are usually referred to as Generally Accepted Accounting Principles (GAAP). GAAP sets its accounting standards and guidelines for preparing financial reports for public, private, non-profitable organizations, and government-owned companies.

Readers of a financial report should be intimated if the information provided in the financial statements follow the GAAP guidelines. The accountant or auditor is responsible for ensuring this procedure.

Fundamental Concepts of Accounting

Business Entity
This principle treats the company as a separate entity from its owners. Personal accounts of owners/partners should be kept separate from profits and expenses of the company. So, the accounting reports are prepared from the viewpoint of business purposes and not from the owner’s outlook.

Cost
This principle states that the company has to consider the original cost of fixed assets like building and machinery, rather than market value. But today, most of the companies report only the market value.

Sincerity
According to this principle, the auditors should prepare the financial reports in order to project the real financial position of the company rather than fabricating facts.

Monetary Unit
This principle assumes that transactions should be recorded in a single currency and exchange rate. This will help the company compare its accounts to the previous years, in spite of a change in the rate of inflation. This principle actually supports the preparation of business reports in a uniform manner.

Consistency
According to this principle, the accountants should use the same methods and functions for different periods of time. For example, the same rate of percentage should be applied for all depreciation. This principle is also known as the principle of regularity.

Prudence
The main objective of this principle is to show the real financial position of the company. The accountants should show the correct revenue accounts and provide a provision for expenses, which may occur in the future.

Matching
According to this principle, all the revenues and concerned expenses incurred should be shown in the same financial period. The main objective is to avoid any overstatements of income at any particular time.

Accrual
This principle requires the company to record the revenue or income when it is actually earned.
Continuity or Going Concern
This principle presumes that the functioning of the company will be smooth and the business entity will continue to operate for a fairly long period. This principle mainly helps in preparing financial statements of the company as well as ensures that investors will get revenue on their investments.

Realization
This concept indicates the actual amount of revenue or cash inflows earned and realized from a business transaction. It means that realization occurs at the time of receiving the cash in the exchange of goods and services, and not at the time when the contract is granted.
Time Period
This principle specifies a particular interval of time for which the financial reports are prepared. It can be either year, fiscal year or short period like a quarter or a month.

Full Disclosure/Materiality
This principle states that the full disclosure of information and events should be ensured. The financial reports should not mislead the investors and should provide clear details of the financial position of the business.

Dual Aspect
According to this principle, all financial transitions have two effects. This concept, which is the cornerstone of accounting principles, assumes that making a record of transactions in the books of accounts has a dual outcome. For instance, getting goods for some amount of money has two effects: (1) paying cash and (2) receiving goods. A record of both should be made into the books of accounts. The dual aspect concept is expressed by the following equation:

Assets = Liabilities + Equity

Assets are owned by a business, and liabilities are the debts of a business, that the company owes to its creditors. Equity is what the company owes to its owners. So all transactions must comply to the above equation.
Due to these guidelines of GAAP, consistency in the methods of preparations of financial accounts of the companies has been maintained. These principles are directly proportional to the complexity of the accounts of a business and may hence, seem complex. The continuing complexity of business transactions has made it necessary for the accounts sector to have some standardization. GAAPs have not only set the benchmark for standardization, but have also ensured that the general public has a clearer view of the financial stability of a company.