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TMI BlogGUIDANCE NOTE ON COST ACCOUNTING STANDARD ON MATERIAL COST (CAS-6)X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. The Companies (Cost Accounting Records) Rules, 2011 provide that every company, including 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 ICWAI, to the extent these are found to be relevant and applicable. The above Rules further provide that these will be applicable to companies wherein aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or wherein 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 wherein 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 for a Cost Auditor appointed under Section 233B of the Companies Act, 1956 to certify inter alia that b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asic equipment, depending upon the operating conditions in the field as standard equipment. Consumable Stores: Consumable stores are items used in the maintenance of plant for example lubricant, cotton waste, paint and the like. Spares are purchased items used for replacement of worn out part of machinery and the like. Other indirect materials are items of small value such as bolt, nut nails, and the like which cannot be directly identified economically with a product and are treated as indirect material. Material acquired in exchange of other material: When material is acquired in exchange for other material or service supplied, the cost of material acquired is taken as cost of material supplied or services provided plus other applicable cost such as freight. In paper industry where bagasse from sugar mill is obtained by the paper mill by supplying coal to the sugar mills, in the cost statement, the cost of coal supplied is included in the cost of bagasse procured. All the above items are identifiable with a product and are classified as direct material cost. Materials are classified under a common designation on the basis of similarities of nature, attribute or relations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economically feasible way. Indirect Materials: Materials, the costs of which cannot be directly attributed to a particular cost object. Material Cost: The cost of material of any nature used for the purpose of production of a product or a service. Production overheads: Indirect costs involved in the production process or in rendering service. Scrap: Discarded material having some value in few cases and which is usually either disposed of without further treatment (other than reclamation and handling) or reintroduced into the production process in place of raw material. Standard Cost: A predetermined norm applied as a scale of reference for assessing actual cost, whether these are more or less. Waste: Material loss during production or storage due to various factors such as evaporation, chemical reaction, contamination, unrecoverable residue, shrinkage etc., and discarded material which may or may not have value. Spoilage: Production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is sold for a disposal value. Net Spoilage is the difference between costs accumulated up to the point of rejection and the salvag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at Annexure II. The cost of the material is determined as per invoice. If supply of material is ex-works of purchaser, there will be no freight and cartage charges in the invoice. In case inward freight is incurred, it shall form part of the cost of procurement of materials and is to be apportioned to the items purchased on rational basis such as weight / number and the like. Imported Material: Following points are to be considered while valuing imported material: (a) Actual customs duty paid on the basis of classification by the Customs Authorities will be assigned, net of any credits. (b) Material imported free of duty or at concessional rate of duty under export incentive scheme will be accounted for at the actual rate of duty applicable so long as there is reasonable expectation that the entity will satisfy the conditions for the duty exemption or concession. In case the material is used for a purpose other than the intended purpose, provision for import duty should be made. This entry may be offset when the material is available for export purposes at the imported parity rate of material. (c) Harbour dues, stevedoring charges, congestion charges, and the like on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for inspection by a third party, specific cost will be assigned to the material inspected. If the Inspection is carried out internally and its cost is significant, it is to be apportioned on the basis of time spent on inspection or other suitable measure of effort. In case the material is supplied by the supplier at his cost and risk with regard to quantity etc, there will be no cost for inspection to the buyer. Other cost incurred for material acquisition is insuring of material. If insurance premium is specific and insured singly, it is to be assigned to the specific material insured. In case it is part of a comprehensive policy then the assignment of the insurance premium will be on the basis of the proportionate value insured. If insurance becomes part of the carrier's responsibility no separate cost will be assigned in this regard. Treatment of containers for materials purchased: Treatment of container cost in the cost of material purchased is as under: Container is non returnable and for which no cost is charged in the invoice: The container cost is included in the material cost. An estimated residual value of the container may be reduced for ascertainment of materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hgear, Computers and the like have innumerable small components either bought or self manufactured. Self manufactured material used in the assembly of main product are also classified as intermediate products. Cost of self manufactured material is to be determined taking into account the cost of direct material, direct employee cost, direct expenses, share of factory overhead and share of administrative overheads relating to production. Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object in an economically feasible way. The term Factory Overheads, Works Overhead, Production Overheads and Manufacturing Overheads denote the same meaning and are used interchangeably. Factory Overheads are the indirect costs incurred in the production process or in rendering service. These are used for a type of cost that cannot be directly assigned to a cost centre or product, but can only be apportioned to cost units. Administrative Overheads are the cost of all activities relating to general management and administration of an organization. These are to be analyzed and distributed between admini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1.6 Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc., before the material is received shall be absorbed in material cost to the extent they are normal, with corresponding adjustment in the quantity. In case of certain materials before its receipt, losses due to shrinkage /evaporation and gain due to elongation or absorption of moisture arises. An anticipated level for such losses or gains for each type of material is to be predetermined. Unit price of material is reduced or inflated to cover the cost of the normal percentage of loss or gain. An illustration is given below: 1000 units of material X purchased @ ₹ 4/- per unit = ₹ 4000 Anticipated loss on shrinkage: 4% i.e. 40 units Receipt will be 960 units and price inflated = ₹ 4000/(1000-40 Units) = ₹ 4.17 per unit If there is gain in the quantity, issue rate will be reduced. Certain materials contain moisture at the time of purchase which may evaporate during summer, thereby losing some weight or moisture may be absorbed during monsoon thereby gaining some weight. One of the methods of dealing with such material is to record the material as dry weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s received should be reduced from the material cost of the products in respect of which the incentives are received. There can be some difficulty to match incentive with the cost of production due to possible timing differences between the period of production, and the period of receipt of the incentives. Incentives are sometimes recorded on the basis of receipt. In such a situation matching becomes difficult. It will be desirable that accounting entries relating to incentives are passed on accrual basis to reflect the true and fair position of the cost of the product in the cost statements. 5.2. Principle of valuation of issue of material 5.2.1 Issues shall be valued using appropriate assumptions on cost flow. The CAS-6 provides for adopting any of the following three methods for valuation of issues of material: (a) First in First out (FIFO) (b) Last in First out (LIFO) (c) Weighted Average Rate Method of valuation of issue of material once adopted shall be followed consistently. If method of valuation is changed, its impact on costs of material shall be disclosed. The FIFO formula assumes a cost flow that the items of materials that were purchased or produced first are is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue, particularly bulk loading. 5.2.2 Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material cost. The standard cost serves as a basis of cost control and as a measure of productive efficiency when ultimately posed with an actual cost. It provides management with a medium by which the effectiveness of current results is measured and responsibility for deviation is placed. Standard costs are used to compare the actual costs with the standard cost with a view to determine the variances, if any, and analyse the causes of variances and take proper measure to control them. In some process industries like refractory, pharma, formulations and the like, standard mix of raw materials is used to determine the cost of material and variance between standards and actual is adjusted periodically. Standard Price Method can also be applied for valuation of issue of material. In this method price of issues is predetermined for a stated period taking into account all the factors affecting price such as anticipated market trends, transportation charges and normal quantity of purchase. Standard prices are determined for each mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be assigned to the specific material transported. 5.2.5 Material cost may include imputed costs not considered in financial accounts. In economics, 'imputed' indicates an ascribed or estimated value when there is no criteria of absolute monetary value for such purpose. In national income estimation, wages of housewives are imputed. Similarly, in farming operations, the wages or salaries of owner are imputed. Imputed costs are similar to opportunity costs. Interest on internally generated fund, not actually paid is an example of imputed cost for a project evaluation. As such there is an imputed cost in all the resources of a business if they are applied to another profitable activity. For example in caustic soda plant hydrogen is produced as by product. If the unit has a captive power plant, it is used as fuel. Its cost is to be imputed based on the fuel substituted such as coal/ furnace oil, based on equivalent calorific value. 5.3 Self manufactured components and sub-assemblies shall be valued including direct material cost, direct employee cost, direct expenses, factory overheads, share of administrative overheads relating to production but excluding share of ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired. Normal Defective/spoilage of material is to be absorbed by good production and abnormal spoilage is to be charged to Profit and Loss Account. For example: Metal poured, due to time lost in pouring, is incomplete on account of loss of temperature. This has to be disposed off as such by re-melting or sold as scrap. In certain types of processes and operations, some material physically disappears on account of shrinkage, evaporation and the like with the result that the quantity of output is less than the quantity of input. In other cases residue such as smoke, dust, gases, slag and the like arises in the course of operation and has practically no measureable value or utility. In some cases, disposal of waste results in further cost to comply with regulatory requirements. In some cases waste may have value. CHAPTER 4 ASSIGNMENT OF COST 6.1 Assignment of costs - Materials 6.1.1 Assignment of material costs to cost objects: Material costs shall be directly traced to a Cost object to the extent it is economically feasible and /or shall be assigned to the cost object on the basis of material quantity consumed or similar identifiable measure and valued as per the principles la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjusted to consumption at the year end. Some organizations follow "Back flush Costing" system. It eliminates detailed accounting transaction. It focuses first on the output of the organization and then works backwards when allocating cost between goods sold and inventories. As soon as a finished good is ready for stock, material is Back flushed (issued) as per the bill of material for that product. Any variation between the actual issues (both quantity and value) and the standard as accumulated over the period is charged off to consumption. Standard Bill of material method is to be used in case of goods, where the direct link of actual consumption for product is not available. The manufacturer using this method should certify the quantitative requirement considered for calculation of material consumption as per Bill of Material. It may be ensured that usage variance is within reasonable limit and it should be adjusted in calculation of cost of production. For tracing of material cost direct to a cost object, concept of "to the extent economically feasible" is also to be taken into account. This requires an exercise to analyse the cost involved, benefit to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s / activity is subcontracted, the subcontract charges related to materials shall be treated as direct expenses and assigned directly to the cost object. This provision covers a situation where the manufacturer gets part of the manufacturing operation subcontracted. For example steel strip is sent to slitter for smaller size, slitting charges paid to subcontractor is to be treated as direct expenses and assigned directly to cost object. 6.3 Assignment of costs- Indirect materials 6.3.1 The cost of indirect materials shall be assigned to the various Cost objects based on a suitable basis such as actual usage or technical norms or a similar identifiable measure. The cost of indirect materials shall be directly assigned to the cost centre where possible under suitable heads as may be economical to aggregate and report under heads like lubricants, tools, consumable stores (building stores, mechanical stores and electrical stores) spares and the like. All the costs under different heads for the cost centres aggregated and accumulated shall be distributed to the production cost centres on a rational basis. 6.3.2 The cost of materials like catalysts, dies, tools, moulds, patterns etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be grouped under major heads like tools, stores and machinery spares, jigs and fixtures, consumable stores, and the like. These items are to be presented in the cost statement under the above broad groups, if they are significant. Chapter 6 Disclosures The following information should be disclosed in the cost statements dealing with determination of material cost. 8.1 Quantity and rates of major items of materials shall be disclosed. Major items are defined as those who form 5% of cost of materials. Major items of raw materials indicating quantity and rates are to be disclosed in the cost statement which constitutes more than 5% of the total cost of materials. An item of cost is considered as major and significant if that item forms at least 5 % of the total cost of materials. Criteria of 5% of disclosure of material has been prescribed taking into account total items to be disclosed in the cost statement shall not exceed 20 items. For instance, imported direct materials is say 4 % of the total direct material cost, it is not material and significant to warrant a separate disclosure. Significant items should be classified and disclosed separately while the other items could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the cost accounting principles and methods during the period resulting in material effect on the cost, the same shall be disclosed indicating its impact in the cost statement. 8.4 Any abnormal cost excluded from the material cost shall be disclosed. Abnormal cost arises due to idle time for some heavy break-down or abnormal process loss. They are not considered in the cost of production and charged to Profit & Loss Account. Materials lost / damaged due to fire and natural calamities which are not considered fit for use are examples of abnormal cost, hence excluded from cost of material. Example: Abnormal cost of ₹ 3 lacs has been excluded in calculating the material cost. This cost is considered abnormal due to a fire accident which took place on 12.02.20XX due to which materials issued for production was lost. The loss of material has been assessed by a surveyor. As the position of allowable claim has not yet been ascertained no credit has been taken for claims recoverable. 8.5 Any demurrage or detention charges, penalty levied by transport or other authorities excluded from the material cost shall be disclosed. As discussed in earlier para, any demurrage, detention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide information that there is no cash outlay and it is only for decision making. For example: In the production of caustic soda, Hydrogen is produced as by-product. It is used as fuel to be burnt in the boiler besides sales. For the quantity burnt as fuel, hydrogen is priced after converting the quantity to thermal equivalent quantity of LSD oil and valued at the price of the LSD Oil. 8.9 Disclosures shall be made only where significant, material and quantifiable. Standard provides that any item of materials forming 5% of the total cost of material is to be disclosed both in quantity, rate and value. Further materiality and significance of information depends on nature, size and complexity of manufacturing operation. An item of material for use in the production of a product may have significance considering the nature of the product. For example, a critical part has been imported under export incentive scheme. It is to be used in the products to be exported. Though its value is less than 5% of the total cost of material, it is to be disclosed in terms of export requirement. Hence it is significant in the context of cost statement. Materiality is to be judged in terms of quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... like and only VAT is paid. Entry will be in regard to purchase price and VAT paid will be adjusted against VAT payment liability. VAT is a state subject. Provisions, rules and regulations governing this tax differ from state to state. A registered dealer can set-off VAT paid on inputs such as raw-materials and other supplies, (VAT credit) against VAT payable on outputs such as finished goods or traded goods (Vat liability). The underlying principle is similar to, CENVAT Scheme. In certain situation VAT credit is not available. These include: ♦ Dealers who are not registered under VAT. ♦ Dealers having a turnover below the threshold limit as fixed under the State Laws on VAT. ♦ Dealers engaged in works contract and option to pay tax by way of composition. ♦ Purchase of goods from unregistered dealers. ♦ Goods purchased in the course of inter-state trade where VAT is disallowed. Annexure III a Landed Cost of imported material on FOB Basis Calculation of landed cost of Imported material on FOB Basis Party's name XYZ Invoice No. MRR Date LC/TT No. 49 15.9.2009 XXX FOB/CIF FOB Bill of Entry No. and date XXX dated 8.10.2009 Item Qty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transport 0 0 0 0 971666 969621 2045 0.210 Particulars Unit Quantity Rate (Rs.) Amount (Rs.) 1 Total sugarcane purchased incl. from own farm MT 971666 Less--normal losses such as driage MT 2045 Actual MT 969621 555.522 538645797 2 Commission paid 17.193 16670694 3 Other expenditure at cane collecting Center (a) Salaries and wages 7.257 7036539 (b) Stores and stationery 1.128 1093732 (c) Repairs and maintenance 0.609 590499 (d) Other expenses 3.187 3090182 4 Loading and unloading charges 3.922 3802853 5 Net harvesting charges 0 0 6 Taxes and levies (a) Cane cess /purchases tax 17.537 17004243 (b) Octroi 0 0 (c) Other levies 0 0 Total MT 969621 606.355 587934541 7 Transport charges (a) Transport cost 0 0 (b) Others 12.765 12377212 8 Cane development expenses (a) Salaries and wages of cane dev. Staff 1.429 1385588 (b) Others 2.378 2305758 Total MT 969621 622.927 604003100 9 Stock Adjustment if any Add- opening stock MT 156 476.692 74364 Less- closing stock MT 294 584.844 171944 10 TOTAL MT 969483 603905520 Annexure V Illustration on treatment of FOREX component XYZ imported Quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 600 350 5 1750 550 2750 Weighted average method: Date Receipts Issue Balance Qty Rate(Rs) Amt(Rs) Qty Rate(Rs) Amt(Rs) Qty Rate(Rs) Amt(Rs) 1-1-09 - - - 2-1-09 300 4 1200 300 4 1200 7-1-09 200 4 800 100 4 400 16-1-09 500 6 3000 600 5.667* 3400 18-1-09 400 5.667 2000 200 5.667 1133 23-1-09 450 5 2250 650 5.2** 3380 29-1-09 100 5.2 520 550 5.2 2860 Weighted average method: *Issue on 18-1-09 → (3400/600=5.667) **Issue on 29-1-09 → (1133+2250)/650=5.2 Annexure VII Illustration of material cost variance (price, use, mix and yield) Examples of material cost variance (price, use, mix and Yield): Material 'A' and 'B' are mixed in the proportion of 60% and 40% respectively and a standard loss of 5% is fixed. Standard and actual cost for a period is Standard Cost as under: Standard Cost Actual Cost Item Qty. (KG.) Rate per unit Total Qty. (KG.) Rate per unit Total Material A 6000 6.00 36000 5000 6.50 32500 Material B 4000 4.00 16000 4500 3.50 15750 Total 10000 5.20 52000 9500 5.08 48260 Loss 5% 500 Output 9500 9000 Variances calculation: Material price variance : Actual qty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchased - Indigenous Salt (Industrial Grade) MT 997500 750 748125000 - Imported 0 0 0 0 (b) Self Manufactured - Power consumed in electrolyser KWH 15250000 5 76250000 Total Direct Material 824375000 2 Process material (a) Barium Carbonate KG 876600 19 16655400 (b) Sodium Sulphite KG 94300 16 1508800 (c) Soda Ash KG 42850 12 514200 (d) Alpha Cellulose KG 6750 96 648000 (e) Flocculent KG 1700 315 535500 Total process material 19861900 Annexure IX (CAS-6) COST ACCOUNTING STANDARD ON MATERIAL COST The following is the COST ACCOUNTING STANDARD 6 (CAS 6) issued by the Council of The Institute of Cost and Works Accountants of India on "MATERIAL COST". 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 principles and methods of determining the Material Cost. Material for the purpose of this standard includes raw materials, process materials, additives, manufactured / bought out components, sub-assemblies, accessories, semi finished goods, consumable s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e costs of which cannot be directly attributed to a particular cost object6. 4.7 Material Cost: The cost of material of any nature used for the purpose of production of a product or a service7. 4.8 Production overheads: Indirect costs involved in the production process or in rendering service8. The terms Production Overheads, Factory Overheads, Works Overheads and Manufacturing Overheads denote the same meaning and are used interchangeably. 4.9 Scrap: Discarded material having some value in few cases and which is usually either disposed of without further treatment (other than reclamation and handling) or reintroduced into the production process in place of raw material9. 4.10 Standard Cost: A predetermined norm applied as a scale of reference for assessing actual cost, whether these are more or less. The standard cost serves as a basis of cost control and as a measure of productive efficiency when ultimately posed with an actual cost. It provides management with a medium by which the effectiveness of current results is measured and responsibility for deviation is placed.10 Standard costs are used to compare the actual costs with the standard cost with a view to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1.6 Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc., before the material is received shall be absorbed in material cost to the extent they are normal, with corresponding adjustment in the quantity. The adjustment for moisture will depend on whether dry weight is used for measurement. 5.1.7 The forex component of imported material cost shall be converted at the rate on the date of the transaction. Any subsequent change in the exchange rate till payment or otherwise shall not form part of the material cost. Explanation: The date on which a transaction (whether for goods or services) is recognised in accounting in conformity with generally accepted accounting principles 5.1.8 Any demurrage or detention charges, or penalty levied by transport or other authorities shall not form part of the cost of materials. 5.1.9 Subsidy/Grant/Incentive and any such payment received/receivable with respect to any material shall be reduced from cost for ascertainment of the cost of the cost object to which such amounts are related. 5.2. Principle of valuation of issue of material 5.2.1 Issues shall be valued using appropriate assumptions on cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t manufactured by a third party according to specifications provided by the buyer, the processing/ manufacturing charges payable to the third party shall be treated as part of the material cost. 6.2.2 Wherever part of the manufacturing operations / activity is subcontracted, the subcontract charges related to materials shall be treated as direct expenses and assigned directly to the cost object. 6.3 Assignment of costs- Indirect materials 6.3.1 The cost of indirect materials shall be assigned to the various Cost objects based on a suitable basis such as actual usage or technical norms or a similar identifiable measure. 6.3.2 The cost of materials like catalysts, dies, tools, moulds, patterns etc, which are relatable to production over a period of time shall be amortized over the production units benefited by such cost. 6.3.3 The cost of indirect material with life exceeding one year shall be included in cost over the useful life of the material. 7. Presentation Cost Statements governed by this standard, shall present material costs as detailed below: 7.1 Direct Materials shall be classified in the cost statement under suitable heads. E.g. ♦ Raw materials, ♦ C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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