COST ACCOUNTING STANDARD-6 MATERIAL 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.

8. Disclosures:

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

• The basis of valuation of material.
• Quantity of major items. Major items are those which form 5% of material cost.
• Change in cost accounting principle if any.
• Exclusion of abnormal cost form the material cost.
• Any payment reduced from material cost.
• Cost of materials procured from related parties.