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TMI BlogGuidance Note on Cost Accounting Standard on Administrative Overheads (CAS-11)X X X X Extracts X X X X X X X X Extracts X X X X ..... g a foreign company defined under section 591 of the Companies Act, 1956 which is engaged in production, processing, manufacturing or mining activities have to maintain cost accounting records in accordance with the Generally Accepted Cost Accounting Principles (GACAP) and Cost Accounting Standards issued by the Institute, to the extent these are found to be relevant and applicable. The above Rules further provide that these will be applicable to companies wherein: (a) aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or (b) the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or (c) the company's equity or debt securities are listed or are in the process of listing on any stock exchange whether in India or outside India. The Companies (Cost Audit Report) Rules 2011 cast a duty on a Cost Auditor appointed under Section 233B of the Companies Act, 1956 to certify inter-alia that books and records maintained by the company are in conformity with the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting and stationery Travelling Local Conveyance Membership fee Computer maintenance expenses for administration Vehicle maintenance expenses and the like for administration. A detailed list of other administrative expenses is at Annexure 1 B. Corporate Office Expenses: Board of Directors: Directors' sitting fees, remuneration and commission; Directors' travelling expenses; Meeting and other board expenses. Other Management Expenses: 1. Administration - Salaries and fringe benefits of general and administrative personnel. For example salaries of managers, and other employees in the administrative functions of the company. Rent, rates and taxes, travelling and other administrative expenses; 2. Cost information should be collected and analyzed systematically and consistently, whether for a routine information system, or for a specific application and/or purpose. In the preparation of cost statement and its attestation, if required, Administrative Overheads relating to a product/service should be determined with reference to CAS-11. CHAPTER 2 DEFINITIONS 4.1 Abnormal cost: An unusual or atypical cost whose occu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. First in First out, Last in First out, Weighted Average. Such basis should be followed consistently. Indirect employee cost is to be measured in terms of CAS-7 (Employee cost). Employee cost relating to administrative staff should be the gross pay and allowances payable. It should take into account the employee's salary including all allowances and other benefits, such as Employer's contribution to EPF, FPS, ESIS, Holiday Pay, Gratuity Payable, Bonus and so on. Remuneration paid to Officers, Managers and Executive Directors of an entity - engaged in administrative function should cover fixed salary, PF contribution, leave, superannuation and severance payment, other benefits, and the like. It should also include any amount paid as commission based on percentage of profit. Other benefits include free furnished accommodation, house rent allowance, leave travel concession, reimbursement of medical expenses for self and family. Personal accident insurance, fully maintained company's car with driver, gardener, watchmen and the like. These should form part of employee cost. Remuneration paid to non-executive directors should be treated as Administrative Overheads. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off (For example a yearly licensing fee which covers maintenance and upgrades automatically provided by the vendor) service potential or future economic benefits obtained will normally expire when the next payment is due and should not be capitalized and charged during the period. In house developed software, as soon as it is put to use, should be capitalized and amortized over its useful life. 5.4 The cost of administrative services procured from outside shall be determined at invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash discount), taxes and duties refundable or to be credited. Various types of services related to administration may be procured from outside, such as legal consultancy, management consultancy, internal audit, and so on. In such cases determination of cost of administrative services procured from outside should be as per agreed price/invoice. It should include duties and taxes and other expenditure. These are to be net of any discount, rebate, taxes and duties refundable, if any. 5.5 Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut any consideration, the cost of the same, if material and quantifiable, should be determined and adjusted against the Administrative Overhead. For example management consultancy services provided to other unit, the cost of the same should be adjusted against the administrative overheads 5.9 Any change in the cost accounting principles applied for the measurement of the administrative overheads should be made only if it is required by law or for compliance with the requirements of a cost accounting standard or a change would result in a more appropriate preparation or presentation of cost statements of an organisation. Resources consumed in the administrative overheads are indirect material, indirect employees cost, utilities and other similar items. These are represented in the form of shared services, infrastructure cost and general management cost. Principles applied for measurement of these resources are to be as per relevant cost accounting standard and are to be followed consistently. However, change in principle of measurement of Administrative Overheads should be applied if it is required by law or for compliance with the requirements of a cost accounting standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or outputs. The tracing of such costs directly usually outweighs the benefit of the increased accuracy in assigning the resources. It is often not possible to physically observe the exact amount of resources consumed by a cost object, especially in case of administrative overhead, being an indirect cost. In case of indirect cost there is no relationship between the cost and cost object and tracing is not economically feasible. The following steps are to be followed when tracing the administrative cost: 1. Identify the activities that cause the administrative costs, 2. Measure the cost of those activities; and 3. Assign the cost of the activities to those products and customers. Various items of administration overheads are first collected according to nature of expenditure. These are arranged according to department or function. This is the method of primary distribution. The expenses which are capable of being identified with a specific department are directly assigned. The expenses which cannot be assigned directly to specific departments are assigned on suitable basis. Examples of direct identifying with department or functions are: Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of these activities are further assigned to other departments based on their usage of the technical services. Assigning Cost - Benefit received: Standard provides for assigning of Administrative Overheads to the various cost objects in proportion to the benefits received by them. Benefits received when measurable and traceable, provide guidance for assignment. The beneficiaries of the output of the cost pool shall be identified and costs allocated in proportion to the benefits received. Benefits received shall be interpreted as meaning the receiving of services or goods by the activity represented by the cost objects to which the costs are being assigned. For example: A corporate wide advertising programme promotes the general image of corporation rather than an individual product. The costs of such programme may be allocated on the basis of division sales in the belief that divisions with higher sales levels are more likely to benefit than divisions with lower sales levels. CHAPTER 5 PRESENTATION 7.1 Administrative overheads shall be presented as a separate cost head in the cost statement. 7.2 Element wise details of the administrative overheads bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises. Office premises measuring 15000 sq ft has been hired from ABC Ltd @ ₹ 1500 per sq ft. The rate is a market prevailing rate for such premises and transaction is at arm's length. Related party disclosure is to be made. Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable reduced from administrative overheads. Any subsidy/grant/incentive or any amount of similar nature received or receivable relating to Administrative Overheads is to be reduced from the Administrative overheads. For example for setting up school in township/adopting any social activity, subsidy/grant received is to be disclosed. Credits/recoveries relating to the administrative overheads. If any credit or recovery is considered while determining the administrative overheads the same shall be disclosed. For Example: certain administrative services were provided during the year to an Associate/Group entity unit, a sum of ₹ 15 lakh received has been credited to the Administrative Overheads. Any abnormal portion of the administrative overheads. Abnormal portion of administrative overhead in the cost of cost object is to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, the fact is to be disclosed by a note to the cost statements. For example Head Office (General Management) expenses were being assigned to various units on the basis of turnover. During the current year the general management expenses have been assigned on a composite ratio which takes into account turnover, capital employed, gross profit, employee cost of units. Previous year's figure is not on comparable basis. ANNEXURE I List of other administrative expenses: i. General Charges; ii. Casual labour; iii. Licence fees; iv. Insurance expenses; v. Training expenses; vi. Printing of the Annual Report; vii. Telephone; viii. Bank charges; ix. Printing and stationery; x. Vehicle maintenance expenses; xi. Travelling and local conveyance for staff; xii. Water charges; xiii. Electricity charges; xiv. Subscription and membership fee; xv. Books and periodicals; xvi. Inspection fees; xvii. Computer maintenance expenses; xviii. Gas charges; xix. Cleaning and plant watering; xx. Advertisement (related to recruitment); xxi. Stipend and trainee expenses; xxii. Gifts and presents; xxiii. Depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of sales 16 Net sales realization 17 Margin (Profit /loss) ANNEXURE III CAS - 11 COST ACCOUNTING STANDARD ON ADMINISTRATIVE OVERHEADS The following is the COST ACCOUNTING STANDARD - (CAS-11) issued by the Council of The Institute of Cost and Works Accountants of India on ADMINISTRATIVE OVERHEADS . In this Standard, the standard portions have been set in bold italic type. This standard should be read in the context of the background material which has been set in normal type. 1. Introduction 1.1. This standard deals with the principles and methods of determining the administrative overheads. 1.2 This standard deals with the principles and methods of classification, measurement and assignment of administrative overheads, for determination of the Cost of product or service, and the presentation and disclosure in cost statements. 2. Objective The objective of this standard is to bring uniformity and consistency in the principles and methods of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object. 9 5. Principles of Measurement 5.1 Administrative overheads shall be the aggregate of cost of resources consumed in activities relating to general management and administration of an organisation. It usually represents the cost of shared services, cost of infrastructure and general management costs. Administrative overheads comprise items such as employee costs, utilities, office supplies, legal expenses and outside services. The principles of measurement of Material Cost, Employee Costs, Utilities, Repairs and Maintenance and Depreciation found in the respective standards will apply to these elements included in administrative overheads. 5.2 In case of leased assets, if the lease is an operating lease, the entire rentals shall be included in the administrative overheads. If the lease is a financial lease, the finance cost portion shall be segregated and treated as part of finance costs. 5.3 The cost of software (developed in house, purchased, licensed or customised), including up-gradation cost shall be amortised over its estimated useful life. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber of employees, turnover, investment size etc. 7. Presentation 7.1 Administrative overheads shall be presented as a separate cost head in the cost statement. 7.2 Element wise details of the administrative overheads based on materiality shall be presented. 8. Disclosures 8.1 The cost statements shall disclose the following: The basis of assignment of administrative overheads to the cost objects. Any imputed cost included as a part of administrative overheads. Administrative overheads incurred in foreign exchange. Cost of administrative activities received from or supplied to related parties 11 . Any Subsidy/Grant/Incentive or any amount of similar nature received/receivable reduced from administrative overheads. Credits/recoveries relating to the administrative overheads. Any abnormal portion of the administrative overheads. Penalties and damages excluded from the administrative overheads. 8.2 Disclosures shall be made only where material, significant and quantifiable. 8.3 Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule. 8.4 Any change ..... X X X X Extracts X X X X X X X X Extracts X X X X
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