CAPTIVE CONSUMPTION.

[Mr. M. GOVINDARAJAN]

                        ‘Captive Consumption’ means the consumption of goods manufactured by one division or unit and consumer by another division or unit of the same organization or related undertaking for manufacturing another product. 

                        The liability of excise duty arises as soon as the goods covered under excise duty are manufactured but excise duty is collected at the time of removal or clearance from the place of manufacture even if such removal does not amount to sale.   The assessable value of goods used for captive consumption is based on cost of production.

                        ‘Cost of Production’ shall consist of –

• Material consumed;
• Direct wages and salaries;
• Direct expenses;
• Works overheads;
• Quality control cost;
• Research and Development cost;
• Packing cost;
• Administrative Overheads relating to production.

For the purpose of arriving at cost of production of goods dispatched for captive consumer adjustment for stock of work-in-progress, finished goods, recoveries for sales of scrap, wastage etc., shall be made.

                        According to the Central Excise Valuation (Determination of Price of Excisable Goods), Rules, 2000 the assessable value of goods for captive consumption is 110% (w.e.f. 5.8.2003) of cost of production of such goods and as may be prescribed by the Government from time to time.  The Cost Accounting Standard 4 (CAS-4), issued by the Institute of Cost Accountants Of India, is to be followed for determining the cost of production to arrive at an assessable value of excisable goods used for captive consumption.

                        To determine the cost of production for captive consumption, calculations of different cost components and adjustments are elaborated below:

• Material consumed – It shall include materials directly identified for production of goods such as indigenous materials, imported materials, bought out items, self manufactured items and process materials and other items.  Cost of material consumed shall consist of cost of material, duties and taxes, freight inwards, insurance and other expenditure directly attributable to procurement.   Trade discount, rebates and other similar items will be deducted for determining the cost of materials, CENVAT credit, credit for countervailing customs duty, sales tax set off, VAT duty, draw back and other similar duties subsequently recovered/recoverable by the enterprise shall also be deducted.
• Direct wages and Salaries – It shall include HRA, overtime allowance and incentive payments made to employees directly engaged in the manufacturing activities.   It also include fringe benefits such as contribution to provident fund and ESIS, bvons/ex-gratia payment to employees, provision for retirement benefits such as gratuity and superannuation, medical benefits, subsidized food, leave with pay and holiday payment, leave encashment and other allowances such as children’s education allowance, conveyance allowance which are payable to employees in the normal course of business etc.,
• Direct expenses – These are the expenses other than direct material and direct employees’ costs which can be identified with the product.   These expenses include cost of utilities such as fuel, power, water, stream etc., royalty based on production, technical assistance/know-how fees, amortized cost of moulds, patterns, patents etc., job charges, hire charges for tool and equipment and charges for a particular product designing etc.,
• Works Overheads – These are the indirect costs incurred in the production process.   These include consumable stores and spares, depreciation of plant and machinery, factory building etc., lease rent of production assets, repair and maintenance of plant and machinery, factory building etc., indirect employees cost connected with production activities, drawing and designing department cost, insurance of plant and machinery, factory building, stock of raw material & WIP etc., amortized cost of jigs , fixtures, tooling etc., and service department cost such as tool room, engineering and maintenance, pollution control etc.,
• Quality Control Cost – It is the expenses incurred relating to quality control activities for adhering to quality control.  These expenses include salaries and wages relating to employees engaged in quality control and other related expenses.
• Research and Development cost – This is the cost incurred for the development and improvement of the process or the existing product.
• Administrative Overheads – This needs to be analyzed in relation to production activities and other activities.   These expenses in relation to production activities shall be included in the cost of production.   These expenses in relation to activities other than manufacturing activities i.e., marketing, projects management, corporate office expenses etc., shall be excluded from the cost of production.
• Packing cost – It includes both cost of primary and secondary packing required for transfer/dispatch of the goods used for captive consumption.

Stock of work-in-progress shall be valued at cost on the basis of completion as per the cost accounting principles.   Similarly stock of finished goods shall be valued at cost.   Opening and closing stock of work-in-progress shall be adjusted for calculation at cost of goods produced and similarly opening and closing stock of finished goods shall be adjusted for calculation of goods dispatched.

                        A production process may result in more than one product being produced simultaneously.   In case joint products are produced, joint costs are allocated between the products on a rational and consistent basis.   In case by-products are produced, the net realizable value of by-products is credited to the cost of production of the main product. taxmanagementindia.com

                        The production process may generate scrap or waste.   Realization or realizable value of scrap or waste shall be credited to the cost of production.  Miscellaneous income relating to production shall be adjusted in the calculation of cost of production.    In case any input material, whether of direct or indirect nature, including packing material is supplied free of cost by the user of the captive products, the landed cost of such material shall be included in the cost of production.  The amortization cost of moulds, tools, dies and patterns shall be included in the cost of production.

                        Interest and financial charges being a financial charge shall not be considered to be a part of cost of production .   Abnormal and non recurring cost arising due to unusual or unexpected occurrence of events, such as heavy break down of plants, accident, market condition restricting sales below normal level, abnormal idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment compensation, lay-off wages etc.,   shall not form part of cost of production. 

 

Discussions to this article

[JAMES PG]

It is pertinent to study the Revised Guidance Note on Cost Accounting Standard on Cost of Production for Captive Consumption (CAS-4)- Jan 2012 Edition published by ICWAI in this regard