Mr. Vijay D Somase

Sunday, April 28, 2024

COST ACCOUNTING RECORD RULES AND COST AUDIT

COST ACCOUNTING RECORD RULES AND COST AUDIT

The institute of Cost and Works Accounting of India (ICWAI) has a pioneer role as premier institution which has undertaken the work of standardizing Cost Accounting practices in India so that the cost of product manufactured in India could be compared with product manufactured in other countries.

To develop Cost Accounting Standard on important issues relating to Cost and Management Accounting, the ICWAI established the Cost Accounting Standard Board (CASB).

Introduction to Cost Accounting Record:

A] Maintenance of record under section 148 of the companies Act, 2013:

1] Every company to which the rules apply should keep and maintain cost records.

2] The cost records shall be kept on regular basis in accordance with the Generally Accepted Cost Accounting Principles and Cost Accounting Standards issued.

3] All cost records shall be reconciled with the audited financial accounts.

4] All cost records shall be duly authenticated by a Cost Accountant.

5] Company is liable to maintain accounts under section 18 of the said Act.

B] Cost Audit under section 148 of the Companies Act 2013:

1] Every company shall within 180 days of the commencement of every financial year appoint a cost auditor at remuneration in accordance with provisions of sub-section (3) of section 148.

2] Every cost auditor who conducts an audit of the cost records of the company shall submit the cost audit report in the Form II specified in Annexure to those rules.

3] Every cost auditor shall forward his report to the Board within 180 days from the close of the company’s financial year to which the report relates. List of records and information:

In order to carry out cost audit effectively and efficiently, the cost auditor requires various documents and he has a right to call for any information and explanation from the authorities of the company. He should give a list of documents that he may require before starting the work.

Following is the list of documents divided in two parts:

A] Specific documents and information

B] General Documents and information

A] Specific documents and information:

1 Memorandum of Association and Article of Association

2 Copies of published accounts of companies for last few years

3 Companies objectives, details of factory, product profile and organisational chart.

4 Internal audit reports

5 Companies Accounting Policy

6 All important manuals.

7 Details of production process.

8 Closing inventory of raw materials

9 Statement of production and dispatches.

10 List of non-moving stores, spares, raw materials etc.

11 Statement showing computation of depreciation.

12 Reports of spoilages, rejections and losses.

13 Cost sheet of service centers.

14 Statement of expenditure on repairs, research & development.

15 Major contracts entered during the period.

16 List of imported items

17 Reports of physical verification

18 Reports of returns submitted to Central Excise Authorities

19 Copy of annual stock taking report verified by Excise officials.

20 Summary statement of electricity generated, purchased and consumed.

21 Summary statement of Central Excise Duties paid.

22 Information related with financial position.

23 Statement of manpower and machine utilization.

24 All statements as per cost accounting record rules.

25 Reconciliation between cost and financial accounts for the year.

B] General Documents and information:

1 Data on general economic environment in respect of the industry such as capacities, production, demand prices, market and international scenario.

2 Government policies on tariff, price control, licensing etc.

3 Efficiency parameters adopted, industry norms given by various associations in the industry.

COST AUDIT PROGRAMME:

A cost audit programme is a written scheme of the exact details of the work to be done by the auditor and his staff in connection with a particular audit.

The cost auditor prepares the cost audit programme before the commencement of cost audit.

The preparation of cost audit programme involves mainly three things:

1] The scope of audit work.

2] Division of work among the staff.

3] Period of audit during which audit is to be completed.

The cost auditor should pay his attention to the following records:

A] Records of materials;

B] Labour records;

C] Records of overhead charges;

D] Depreciation;

E] Records of work in progress;

F] Incomplete contracts.

A cost audit programme should ensure:

1] that all items to be audited are covered;

2] that the audit will be completed in time allowed;

3] work done by the assistants is reviewed from time to time;

4] documentary evidence is avaialable.

The cost auditor should ask the following questions in the nature of ‘YES ‘& ‘NO’ to the respective authorities. MATERIAL:

1 Is there a system of checking materials as and when received?

2 Are the maximum, minimum. Ordering and danger levels fixed?

3 Are the levels fixed strictly adhered to?

4 Are goods received noted written up for all materials and inspection reports prepared regularly?

5 Is an entry made in Bin card immediately from Goods Received Notes?

6 Are the materials received only against requisitions?

7 Are material transfer notes prepared for transfer of material from one job to another?

8 How are the material issues priced?

9 Is there a perpetual inventory system?

10 How much each item of material has contributed to total material cost in last three years?

LABOUR:

1 Is there a system of comparing the works attendance cards with the Attendance Register and the Foreman’s Register?

2 Are proper records maintained in respect of wage paid to workers working on piece rate system?

3 Is the labour classified as direct and indirect?

4 Is there internal control system in respect of preparation and payment of wages?

5 Is the proper and qualified person appointed for payment of wages?

6 Is bonus paid to workers on the basis of efficiency?

7 Is there a system to check the overtime work?

8 Are wages and salaries paid properly?

9 Is proper record maintained regarding idle time?

10 Is idle time classified as normal and abnormal for the purpose of accounting?

COST ACCOUNTING RECORDS:

Section 209 provides that a company, pertaining to any class of companies engaged in production, processing, manufacturing or mining activities should keep proper books of accounts showing utilisation of materials or labour. The Central Government has notified Cost Accounting Record Rules for more than 36 industries. These rules prescribe the manner in which Cost Accounting Records should be maintained and also specify the particulars which should be entered in the books of accounts.

The following are some of the main heads in which costs are generally required to be compiled:

Head

Records to be maintained

Material

Record of receipts, issues, balances, consumption, loss of material in transit, transfer of material, reconciliation.

Consumable Stores, Tools & Machinery

Record of receipts, issues, balances, consumption of each item and tools.

Services

Record of cost of power, fuel, steam etc.

Wages & Salaries

Attendance records, system of remuneration and incentives paid, record of idle time and its calculation.

Service Department expenditure

Expenses for these departments are to be calculated separately. The allocation or apportionment of expenses to be maintained.

Depreciation

The amount of depreciation, method of depreciation.

Royalty and Payment of Technical Aid

Basis of calculating the amount of royalty and charging royalty and other allied payments to production costs are to be recorded.

Overheads

Record must be divided into works, administration, selling and distribution overheads. Method of collection, allocation, apportionment should be indicated. Record of variances should be maintained.

Work-in-Progress

The value of work –in-progress should include materials, wages, overheads and depreciation. The

records should also show the quantities of work-in-progress.

Reconciliation

Reconciliation statements of cost and financial accounts should be maintained

Stock Verification

Records of stock verification of raw materials, components, stores, spare parts should be maintained.

VERIFICATION OF COST RECORDS:

The cost auditor is expected to examine the rules for general guidance before he undertakes audit of such industries. The report has to be submitted to the Central Government under section 233 B and not to the Registrar of Companies. He has to send a copy of the report to the concerned companies.

The cost auditor review and verification of the cost accounting records includes the following:

1] Method of Costing in use.

2] System of fixation of cost centres.

3] Method of accounting of raw materials, packing material, process materials and stores and spares.

4] Method of accounting of wastages, spoilages, rejections and sub-standards.

5] System of recording of wages, salaries and overtime anf their allocation to the cost centres.

6] Incentive schemes.

7] Basis of allocation / apportionment.

8] Method of accounting for depreciation and charging to cost centres.

9] Method of apportionment of service department expenses.

10] Basis of apportionment of overheads to cost centres and of absorption to products.

11] Basis of absorption of interest, bonus, gratuity etc.

12] Treatment of research and Development expenses.

13] Method of production accounting.

14] Special contracts related with sales, purchases and services.

15] Budgetary control system.

16] Internal audit system.

17] Methods of evaluating labour

18] Method of evaluating work-in-progress.

19] System of stock taking.

20] Policy for valuation of inventories.

COST AUDIT NOTES:

Cost audit notes is concerned with disclosing material information on accounts so as to present the ‘truth and fairness’ of the state of affairs on the part of an entity for the knowledge of the readers of such accounts and also for the satisfaction of the auditor. APPOINTMENT OF COST AUDITOR:

The Cost Auditor has to be appointed by the Board of Directors under section 233-B of the Indian Companies Act subject to prior approval of the Company Law Board. For appointment of auditor, the Board of Directors is required to pass a resolution in its meeting or by circulation with a condition that the same is subject to approval of the Central Government.

Cost Auditor is not appointed on regular annual basis as like financial auditor because cost audit is not an annual feature. It is conducted only when ordered by the Central Government. Eligibility for Appointment:

The following persons are eligible to be appointed as cost auditor under section 233-B:

1] Cost Accountant within the meaning of Cost and Works Accountants Act, 1959, or

2] Any such Chartered Accountant within the meaning of the Chartered Accountants act,1949 and a fellow of the Institute Chartered Accountant of india

for a period of 10years and has passed Part 1 of the management Accountancy Examination of the Institute of Chartered Accountants of India, or

3] Other person, as may possess the prescribed qualifications. Disqualification for Appointment as Cost Auditor:

Section 233-B (5) (a) deals with the qualification of a person for appointment as Cost Auditor.

The disqualification are as follows:

1] An officer or employee of the company is not qualified to be a Cost Auditor.

2] A person who is a partner or who is in the employment of a company shall not be a Cost Auditor.

3] A body corporate cannot be a Cost Auditor.

4] A person who is indebted to the company for more than Rs.1,000 or who has given any guarantee or provided any security in connection with the indebtedness of nay third person to the company for an amount exceeding Rs.1,000.

5] Any person appointed as a financial auditor of the company shall not be appointed as its Cost Auditor. RIGHTS OF A COST AUDITOR:

1] He has a right of access at all times to the books of accounts and vouchers of the company.

2] He has a right to get such information and explanations from the officers of the company as he may think necessary for the performance of his duties as an auditor.

3] He has a right to get all facilities and assistance from the company to perform his duties as an auditor.

4] The company and every officer, in default of not providing the accounts, vouchers, information, explanations etc. to the auditor, shall be punishable with fine.

DUTIES & RESPONSIBILITIES OF A COST AUDITOR:

1] He is liable to the company if he does not perform his duties properly or is guilty of negligence.

2] He also owes a legal responsibility to third parties who might have been misled by his audit certificate and acted in reliance thereon.

3] He should maintain his working papers as an evidence of his having carried out his duties.

4] He should not disclose any confidential information which he might have acquired in the course of his work and should not use such information for personal gain or gain of a third party.

5] He is responsible to answer any query required by the Central Government on a scrutiny of the cost audit report submitted by him.

6] He is criminally liable for falsification of books. If he is found guilty of falsification, he shall be punishable with imprisonment for a term which extends to seven years and he shall also be liable to fine in addition.

COST ACCOUNTING STANDARDS

To develop Cost Accounting Standard on important issues relating to Cost and Management Accounting, the ICWAI established the Cost Accounting Standard Board (CASB).

Objectives of Cost Accounting Standards:

1] To help Indian industry and the Government towards better cost management.

2] To assist the management to follow the standard cost accounting practices in the matter of compliance of statutory obligations.

3] To assist the Cost Accountants in preparation of uniform cost statements.

4] To equip the profession with better guidelines on standard cost accounting practices.

5] To provide guidelines to Cost Accountants to make standard approach towards maintenance of Cost Accounting Record rules and undertaking Cost Audit under Section 209 and 233 B of the Indian Companies Act, 1956 and various other laws like Income Tax Act, Central Excise Act, Customs Act, Sales Tax (VAT)etc.

Generally Accepted Cost Accounting Principles (GACAP)

The compilation of GACAP by the ICWAI is a unique effort to record principles and practices in the discipline of Cost Accountancy in India, which takes into consideration the global practices as well.

Objectives of GACAP:

1] To codify the GACAP as applied in the Indian industry.

2] To narrow down diversities in cost accounting practices facilitating the process of development of cost accounting standards.

3] To provide a reference source to industry and practitioners in preparation and attestation of cost statements, where specific cost accounting standards are yet to be issued.

4] To provide a reference source to all the stakeholders in the understanding and interpreting the cost statement.

5] To provide a base for monitoring the evolution of new concepts and practices in cost accounting and to codify them as and when they become generally accepted.

Scope:

The scope is to codify the cost accounting principles to be followed by business and other entities in India in preparing and presenting cost information more particularly the General Purpose Cost Statements covered by Cost Audit. This document also encompasses the generally accepted cost accounting practices presently being followed by such entities.

Principles applicable to Elements of Cost:

This section deals with GACAP applicable to individual elements of cost.

1] When an element of cost is accounted at standard cost, variances due to normal reasons are treated as a part of the element wise cost. Variances due to abnormal reasons will not form a part of the cost.

2] Any subsidy, grant, incentive and any such payment received / receivable with respect to the input cost is reduced from cost for ascertainment of the cost to which the cost pertains.

3] Any abnormal cost where it is material and quantifiable will not form part of a cost.

4] Costs reported under various elements of cost will not include imputed costs.

5] The measurement for cost accounting purposes will follow the same principles as set out in Generally Accepted Accounting principles, applicable to the concerned entity.

Presentations and Disclosures:

1] Cost statements must contain total cost, unit cost per unit of output.

2] Output quantities with unit of measure must appear in the Cost statement.

3] Input costs are best broken up as quantity and rate.

4] The basis of valuation of inputs must be stated.

5] The basis of cost distribution to cost objects or cost centres must be disclosed.

6] Costs incurred in foreign currency must be stated separately.

7] Any costs excluded must be disclosed.

8] Transactions with related parties must be highlighted or disclosed separately.

9] Changes in costing principles and methods applied must be disclosed with the effect.

10] Cost details of all ancillary products or activities may be maintained under a miscellaneous group and disclosed appropriately.

Constitution of CASB:

The CASB is constituted by the Council of the ICWAI. The chairman and other members are appointed and nominated by the Central Council of the ICWAI. The technical Director is the secretary of the CASB. The term end period of appointment is decided by the Council of the ICWAI.

Scope and Applicability of Cost Accounting Standards:

The standards issued by CASB are recommendatory in nature and every member of the ICWAI is expected to honour the same. Standards comply the legal requirement in respect of the matter covered by it, however, the standards by their very nature are more definite and specific than their legal requirements. The standards are applicable in preparation of cost statements and other documents where the concept embedded in the standard is applicable.

COST ACCOUNTING STANDARDS:

1] Cost Accounting Standard No-6: “Material Cost”

2] Cost Accounting Standard No-7: “Employee or Labour Cost”

COST MANAGEMENT FOR AGRICULTURAL SECTOR IN INDIA

Agriculture is the primary source of livelihood for a major part of India’s population. India is among the 15 leading exporters of agricultural products in the world. India is the world’s largest producer of milk, pulses and spices and has world’s largest cattle herd as well as the largest are under wheat, rice, cotton, sugarcane, farmed fish, sheep and goat meet, fruits and vegetables and tea.

In recent years, cultivators are becoming more cautious about the costs and returns from agriculture in general and enterprises on the farm in particular. Government takes into account the cost of production in deciding the price policy and for declaring the minimum support prices for selected important crops. The commission which recommends the minimum support prices to Government is known as “Agricultural Cost and Price Commission”.

The cost management for agriculture is to be classified into three types:

COST A:

It includes actual paid out costs for owner cultivator. This cost approximates the actua expenditure incurred in cash and kind and includes the items such as hired human labour, owned and hired bullock labour, seeds, manures, fertilizers, implement charges, land revenue and other taxes, irrigation charges and other miscellaneous charges.

COST B:

It includes rental value of owned land and imputed interest on demand capital.

COST C:

It is the total of all cost items, actuals as well as imputed.

Elements of Agricultural Cost:

It is classified into direct and indirect costs.

Direct costs includes human labour family and exchange, bullock labour owned, hired and exchange, hired charges for machinery equipment, costing material used for seeds, manures, fertilizers, pesticides etc, land revenue charges, irrigation charges and the marketing cost.

Indirect or overhead cost includes land implementation costs like farm building, fencing, wells, indirect labour, depreciation on machinery and equipment, interest and rent.

Evaluation:

The agricultural items of costs are evaluated by using different methods of depreciation of assets or by computing cost of production per unit.

Important concepts in Agricultural costing:

1] Opportunity Cost:

It is also called as a alternative cost. Opportunity cost is the earning from the next best alternative method. The opportunity cost of a resource is the value of the product not produced or activity not carried out. Opportunity costs represent the potential benefits of an individual, investor or business misses out on when choosing one alternative over another.

2] Marginal Value Productivity:

Marginal value product is the marginal revenue created due to an addition of one unit of resource. As the farmer adds resources, marginal value productivity of the resources eventually decrease in the enterprises receiving more and more of the resources.

Commission for Agricultural Costs and Prices:

CACP (Commission for Agricultural Costs and Prices) is a decentralized agency of the Government of India. It was established in 1965 as the Agricultural Prices Commission, and was given its present name in 1985. It is an advisory body, non-statutory attached to the Ministry of Agriculture and Farmers Welfare, Government of India.

This commission was established to recommend Minimum Support Prices (MSPs), to motivate cultivators and farmers to adopt the latest technology in order to optimize the use of resources and increase productivity.

The commission consists of a chairman, member secretary, one official member and two non-official members. The non-official members are representatives of the farming community and usually have an active association with the farming community.

Today the commission recommends MSPs for 7 cereals, 5 pulses, 7 oilseeds and 4 commercial crops.

Major Costs in managing Agricultural Business:

1] Fixed Cost:

Important Features of Fixed Costs in Agricultural Purpose:

1] It is associated with at least one fixed resource in the short term.

2] It is incurred even though no output is produced.

3] It is fixed only after the expense has been incurred.

4] It is primarily a function of time and not output.

5] It is not the relevant costs in determining the optimum level of input use.

2] Variable Cost:

Important Features of Variable Costs in Agricultural Purpose:

1] It refers to costs incurred on inputs.

2] Variable cost is exhausted in one use in the production process.

3] It changes with the levels of production.

4] If there is no production then there is no variable cost.

5] These costs are used in determining the optimum level of input use.

3] Cash and Non-cash Costs:

Cash cost is a term used in cash basis accounting that refers to the recognition of expenses as they are paid in cash. It requires current cash outlays.

Non-cash costs can be deferred to later periods for payment, because non-cash can be deferred in the decision making process.

4] Marginal Costs:

It is the cost incurred for producing additional unit of output. Marginal cost is important in farm management decision making because it must be compared to the revenue earned by setting the additional unit of output. Marginal cost and Marginal returns are the indicators to show at what level profit will be maximize. Profit will be maximum when marginal cost is equal to marginal return.

5] Average Fixed Cost:

This cost is computed by dividing fixed cost by the number of output units.

6] Average Variable Cost:

This cost is computed by dividing the total variable cost by the number of output units.

7] Average Total Cost:

This cost is computed by adding together average variable cost and average fixed cost.

COST MANAGEMENT FOR INFORMATION TECHNOLOGY SECTOR

Introduction:

Cost Management is an integral part of the business management that works on the basis of estimates, wherein various activities such as collecting the data, analyzing the data and mechanism evaluation of the process and reporting.

ITIL (Information Technology Infrastructure Technology)

ITIL is the framework designed to standardize the selection, planning, delivery, maintenance and overall lifecycle of Information Technology services within a business. ITIL framework enables I.T. administrators to be business service partners.

I.T.financial management helps an I.T. organisation to determine the financial value of I.T.services provided to the customers. ITIL refers to the activity as service valuation based on the cost of the service and value added by both the I.T. service provider and the customers own assets.

Accounting, Charging and Budgeting are the three important customer facing ITIL Processes.

I.T.ACCOUNTING:

I.T.Accounting helps the organisation to monitor the I.T.expenses against budgeted goals and prevent budget deficits and losses. I.T. accounting provides an organisation with a standard language that internal and external customer’s business partners, and I.T. can use to evaluate the cost and benefits of I.T. services, standard rates and standard approaches to measure utilization or consumption of services. This helps to improve customer satisfaction.

I.T. Accounting is the process of collecting financial information for I.T. services and organizations. It helps the organization to determine the financial cost, benefits and risks of an IT service. By using accurate I.T. accounting information, an organisation can effectively value the services to satisfy its customer, manage demand and maximise the return of its investment through service portfolio management.

Cost classification Cost and benefit types and customer service recording are the three important characteristics of I.T.Accounting Framework.

I.T. CHARGING:

It is the process of billing for the I.T. service rendered to internal or external customers. The charging process uses two main sets of information:

1] Rates based on accounting information, forecasts of current and future customer demand,

2] Usage information based on actual measures and estimates.

I.T.Chargeback:

It is an accounting strategy that applies the costs of I.T. services, hardware or software to the business unit in which they are used.

I.T. Showback; Showback offers departmental visibility into I.T. resources usage without charging departments for their use. When a Showback occurs, a document similar to a billing statement is sent to the I.T. department showing them the cost of an individual department’s usage but it is not expected to pay for it.

The IT charging activity combines the rate of service and the measure of consumption or utilization to create a bill or charge for the internal or external customer. The formula for cost price is as under:

Service rate X Service utilisation = Cost or Assessed Cost.

I.T.BUDGETING:

Budgeting is the process of planning and controlling the activities of an organisation. It is a financial plan for the objectives during the period covered by budget, which is predicted on the base of historical data. I.T.budgeting identifies all future I.T.expenses related to a particular service, operation or customer for a given period of time.

Preparation of I.T.Budget:

For preparing the I.T. budget ongoing expenses and project expenditure amounts are considered.

Ongoing expenses include expenses of staffing and compensation, hardware, software-licenses, subscriptions, clouds services, internet and telephone, support contracts, network infrastructure, client computing resources etc.

Project expenditure includes consulting expenses, general and administrative expenses, security hardware and software etc.

Types of I.T.Costs:

1] Development Cost:

This is the cost of developing new applications and devices having their value included as assets, which affect the fixed asset cost during their period of use. Development cost is divided into particular activities through specific drivers. Each of these activity is composed of the costs of collaborations, structures and other costing items linked to each activity.

2] Production Cost:

It is composed of Data Centre and the Support Cost. The Data centre has numerous services whose objective is to process data. The support cost must be treated together with the Data Centre Cost to maintain the data centre in operation and to follow its indicators.

COST ACCOUNTING STANDARD-7 EMPLOYEE COST

1. Introduction:

This standard deals with principles and methods of determining the employee cost. This standard deals with the principles and methods of classification, measurement and assignment of employee cost for determination of the product cost or service and the presentation and disclosure in the cost statements.

2. Objective:

The objective of CAS-7 is to bring uniformity and consistency in the principles and methods of determining the employee cost with reasonable accuracy.

3. Scope:

This standard should be applied to cost statements which require classification measurement, assignment, presentation and disclosure of employee costs including those requiring attestation. 4. Important Definitions in CAS-7: The following terms are being used in this standard with the meaning specified.

1] Abnormal Cost:

An unusual cost which does not occur regularly and is always unexpected due to some abnormal situation of the production or operation is known as abnormal cost.

2] Abnormal Idle Time:

An unusual occurrence which is irregular and unexpected or due to some abnormal situations is known as abnormal idle time.

3] Administrative Overheads:

It is the cost of all activities relating to general management and administration of an entity.

4] Cost Object:

It is an activity, contract, cost centre, customer, process, product, project service or any other object for which costs are ascertained.

5] Direct Employee Cost:

It is the employee cost, which can be attributed to a Cost object in economically feasible way.

6] Distribution Overheads:

Distribution overheads, also known as distribution costs. It is the cost incurred in handling a product or service from the time it is ready for dispatch delivery until it reaches the ultimate consumer including the units receiving the product service in an inter-unit transfer. The cost of any non-manufacturing operations such as packing, repacking, labelling, etc. at an intermediate storage location is the part of distribution cost.

7] Employee Cost:

Employee Benefits paid or payable in all forms of consideration give for the service rendered by employees is known as employee cost. It is explained as follows:

1] Contract employees include employees directly engaged by the employer on contract basis but does not include employees of any contractor engaged in the organisation.

2] Compensation paid to employees for the past period on account of any dispute /court orders shall not form part of Employee Cost.

3] Short provisions of prior period made up in current period shall not form part of the employee cost in the current period. Employee cost includes payment made in cash or kind. Eg-Employee Cost Salaries, wages, allowances and bonus / incentives, Contribution to provident and other funds, Employee welfare etc. Employee Cost as future benefits includes Gratuity, Leave encashment, Voluntary retirement schemes, other retirement/separation benefits etc. The benefits include paid holidays, leave without pay, medical benefits, free or subsidized food, housing, education to children, conveyance leave travel etc.

8] Idle Time:

It is the time for which employees are paid for no work.

9] Indirect Employee Cost:

This is the cost which cannot be directly attributed to a particular cost object.

10] Marketing Overheads:

It comprises of selling and distribution overheads.

11] Overtime Amount:

This is the extra amount payable apart from the normal wages and salaries for the extra working hours.

12] Production Overheads:

It is the indirect cost involved in the production of a product or in rendering service.

13] Selling Overheads:

These are he expenses related to sale of products or services and includes all indirect expenses incurred in selling the products or services.

5. Principles of Measurement:

Employee cost shall be ascertained considering the gross pay including all allowances payable along with the cost of the employer for all the benefits provided. Bonus payable as a statutory

minimum or on a sharing of surplus shall be treated as part of employee cost. Remuneration payable to executive directors on the board and other officers of a corporate body under statute should be considered as employee cost. The cost of free or subsidized housing, education, conveyance, canteen, health and any other similar benefits should be treated as employee cost.

Employee cost should not include the imputed cost, penalty, damage paid to statutory authorities, abnormal cost etc.

6. Assignment of Costs:

Where the Employee services are traceable to a cost object, such Employees cost shall be assigned to the cost object on the basis such as time consumed or number of employees engaged etc or similar identifiable measure. While determining whether a particular Employee cost is chargeable to a separate cost object, the principle of materiality shall be adhered to. Where the Employee costs are not directly traceable to the cost object, these may be assigned on suitable basis like estimates of time based on time study. Recruitment costs, training cost and other such costs shall be treated as overheads and dealt with accordingly. Overtime premium shall be assigned directly to the cost object or treated as overheads depending on the economic feasibility and the specific circumstance requiring such overtime. 7. Presentation This segment deals with the presentation of cost statements governed by the standard. Direct Employee costs shall be presented as a separate cost head in the cost statement. Employee costs shall be presented in cost statements as a part of overheads relating to respective functions eg manufacturing administration, marketing etc. The cost statement shall furnish the resources consumed on account of Employee cost, category wise such as wags salaries to permanent temporary, part time and contract employees piece rate payment, overtime payments etc.

8. Disclosures:

The following information should be disclosed in the cost statements dealing with the employee cost. The disclosures may be made in the body of cost statement or as a footnote or as a separate schedule.

Employee cost attributable to capital works or jobs.
Separation cost payable to employees.
Abnormal costs.
Penalties and damages excluded from employees cost.
Employee cost incurred in foreign exchange.
Any subsidy, grant, incentive reduced from employee cost.
Any change in cost accounting principle and methods applied for the measurement and assignment of employee cost.

COST ACCOUNTING STANDARD-6 MATERIAL COST

1. Introduction:

This standard deals with principles and methods of determining the material cost. This standard deals with the principle of valuation of receipts and issues of materials and assignment of material cost to the cost objects.

2. Objective:

The objective of CAS-6 is to bring uniformity and consistency in the principles and methods of determining the material cost with reasonable accuracy.

3. Scope:

This standard should be applied to cost statements which require classification measurement, assignment, presentation and disclosure of material costs including those requiring attestation.

4. Important Definitions in CAS-6:

The following terms are being used in this standard with the meaning specified. Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/or due to some abnormal situation of the production or operation Administrative Overheads: Cost of all activities relating to general management and administration of an entity. Cost Object: An activity, contract, cost centre, customer, process, product, project service or any other object for which costs are ascertained. Defectives: Materials, products or intermediate products that do not meet quality Standards. This may include reworks or rejects. Reworks: Defectives which can be brought up to the standards by putting additional resources. Rework includes repairs, reconditioning and refurbishing. Rejects: Defectives which cannot meet the quality standards even after putting in additional resources. Rejects may be disposed off as waste or sold for salvage value of recycled in production process.

Imputed Costs:

It is the notional cost computed for any purpose.

Intermediate Product:

It is a product that requires further processing before it is saleable.

Materials:

It includes direct and indirect materials.

The cost of material which can be easily attributed to a cost object is known as direct material. The cost which can’t be easily attributed to a particular cost objet is known as indirect material.

Material Cost:

The cost of material used for the purpose of production of a product or rendering a service is known as material cost.

Waste and Spoilage:

Material lost during the production or storage and discarded material which may or may not have any value is known as Waste.

Production that does not meet the quality requirements or specifications and cannot be rectifies easily is known as Spoilage.

Scrap:

Discarded material having no value and which is usually disposed off without further treatment or reintroduced into the process in place of raw material is known as Scrap.

Production Overheads:

Indirect costs involved in the production of a product or in rendering service is known as production overheads. It is also known as works overheads or factory overheads or manufacturing overheads.

Standard Cost:

A predetermined cost of a product or service based on technical specifications and efficient operating conditions is known as standard cost.

5. Principles of Measurement:

It includes principle of valuation of receipt and issues of material.

The material receipt should be valued at purchase price including duties and taxes, carriage inwards, insurance and other expenditures. Self-manufactured material should be valued including direct material cost, direct labour cost, direct expenses, factory overheads, administrative expenses. Normal loss or spoilage of material before reaching the factory shall be absorbed in the cost of balance materials. Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture before the material is received shall be absorbed in material cost.

Various methods of ricing such as LIFO, FIFI, SAM, WAM etc. shall be followed for the valuation of material regularly. If materials are accounted at standard cost, the price variances related to materials shall be treated as a part of material cost. All abnormal costs shall be excluded from the material cost.

The material cost of scrap and defectives which are considered as rejections shall be included in the material cost of goods manufactured. Material cost of abnormal scrap or defectives should not be included in material cost.

6. Assignment of Costs:

This part deals with the basis of cost assignment to the product cost or service.

It provides the details of assignment of costs to materials, direct expenses and indirect materials.

7. Presentation:

This segment deals with the presentation of cost statements governed by the standard. In cost statement direct materials are classified into raw materials, components, semi-finished goods and sub-assemblies. Indirect materials are grouped into heads like tools, spares, stores, fixtures, consumable stores etc.