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CA Intermediate · Cost and Management Accounting · Cost Sheet

Which of the following items is excluded from the cost of production (factory cost) when preparing a cost sheet?

Administrative office rent is excluded from factory cost because it is an administration overhead, added only at the cost of production and cost of sales stages. Factory depreciation, carriage inwards and production royalty all arise in making the goods and so enter factory cost.

  1. ADepreciation on factory machinery
  2. BCarriage inwards on raw materials
  3. CAdministrative office rentCorrect
  4. DRoyalty on production paid per unit manufactured

Explanation

Cost of production includes prime cost plus factory overheads, so depreciation on factory machinery is included. Carriage inwards is part of material cost, and royalty on production is a direct expense. Administrative office rent is an administration overhead, which is added only after factory cost to reach the cost of production and later cost of sales.

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