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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 ..... in CAS-6 for ready reference. 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 Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , accessories are supplied with the basic 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking. Direct Materials: Materials, the costs of which can be attributed to a cost object in an 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost are: Cenvat Credit Countervailing/custom duty credit Vat credit Any other tax Illustration on valuation of receipt of indigenous supply is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd handled singly, it is to be assigned to the material handled. If employees are used for handling the material, it is to be apportioned on the basis of time taken by them. Incoming Inspection: If the material calls 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blies and subassemblies, accessories and the like manufactured internally for making the final product. For example, gear box assembly, steering system assemblies and the like are made separately and used in the final product assembly. Many products like TV, Switchgear, 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be. The normal loss is to be absorbed by the good units. Abnormal loss of material is charged to Profit and Loss Account and does not form part of the cost of material. In case of spoiled material if there is any significant realizable value , loss is to be accounted net of such value. 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, issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed cost for which these are intended to compensate. Subsidy received for any material is to be reduced from the material cost. There can be some subsidy for using materials produced by a specific priority industry or energy saving device and the like. Such subsidy is to be adjusted from the material cost. Incentives 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mention is petroleum product when issued for further processing. For example Fuel oil is supplied in KL (volume) and its price is also in terms of Rs./KL. This price is related to at a volume measured at 29.5 0 C (All India ambient temperature) and a temperature variance allowance is given if the item is considered at a higher temperature at the time of issue, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortation. Inward freight shall form the part of the cost of material. In case inward freight charges are indicated in the invoice, which is for more than one material, inward freight shall be allocated to different materials indicated in the invoice on reasonable and appropriate basis such as weight, volume, numbers and the like. If the material is carried by a special carrier, it 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 capti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gold. Thus its recovery value depends upon the type of material. There are several methods of accounting of scrap as detailed below: 1. Scrap sales credited to revenue 2. Scrap sales credited to production overhead 3. Scrap identifiable with a job, and its realizable value is credited to the job. Defective /Spoiled material arises when the material does not meet the exact specification of the material required. 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 regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any. Such consumption in quantity may be derived by two methods. Method (i): Based on actual issues for batch, unit or job: This method is preferred as it establishes direct relationship of actual material usage for the product. Method (ii): Based on any method other than actual, for example, Standard: Under this method material is issued as Standard Bill of material. The standard cost for each direct material is defined at the beginning of the year. The variances from standard on account of price / consumption and the like are 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires trimming, machining and polishing, heat treatment after pouring and the like. One of these operations is subcontracted. The activity subcontracted and its cost is part of the material cost. Example (2): A metal sheet is given to another unit for conversion into specific measurement for use in a press; the material cost is increased to take care of the change in shape done before using in production. Such cost is part of the material cost, as the material is made fit for the operation. 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. 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial or self manufactured. Raw Material cost is to be indicated separately for indigenous and imported raw material consumed. This requirement of presentation by source wise also applies to other types of material viz. components, semi-finished and sub-assemblies also. In process industry direct material is classified as raw material, additives / filler, process chemicals and dyes. Illustration of the manner in which material cost should be presented is in Annexure VIII a to VIII c. 7.3 Indirect Materials shall be classified in the cost statement under suitable heads. Indirect material consumed should 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctively form more than 5 % of the material cost are classified as components. Direct materials constitute 75 % of the total material cost. 8.3 Any change in the cost accounting principles and methods applied for the determination of the material cost during the period covered by the cost statement which has a material effect on the cost of the material shall be disclosed. Where the effect of such change is not ascertainable wholly or partly, the fact shall be indicated. The cost accounting principles and methods adopted for determining the material cost is to be followed consistently from one period to subsequent period. If there is any change in 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : During this year 2500 engines valuing ₹ 215 lacs were supplied by XYZ Ltd. Of these, 2200 engines valuing ₹ 198 lacs were consumed and they are shown under the bought out components in the direct material cost in the cost statement. The price fixed is based on the assessable value for Excise duty plus 10 % mark-up on that. This valuation has been consistent and considered as reasonable by the management. There are no other related party transaction relating to purchase of material. 8.8 Any cost imputed in arriving at the material cost shall be disclosed. As defined in the standard, imputed cost is a notional cost. It does not involve any cash outlay. It is computed only for the purpose of decision making. If any cost is imputed in arriving at material cost, it is to be disclosed to provide 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 12 Urea Raw naphtha/ammonia/lignite/coal 13 Rayon and Synthetic Fibre Yarn Wood pulp/staple fibre 14 Cotton Yarn Cotton 15 Wollen Fabrics Woollen Yarns 16 Cement Lime stone and gypsum 17 Zinc Zinc ore 18 Aerated water Concentrate 19 Coffee powder Coffee beans 20 Gear, Pinion, shaft Rough forging for such items Annexure II Illustration on valuation of receipt of indigenous supply XYZ co Faridabad Inv.No.KKM/29[2009] To M/s KLM, Noida Item Quantity Nos. Rate Rs./Unit Amount (Rs.) 1. Bottom Cap 2. Top Cap 2200 2200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (Kg.) Rate per unit Bill Value ($ = ₹ 50.55) P .Black 10800 $3.00 $ 32,400 1637820 Amount(Rs.) a. Assessable value B/E (101% of value) 1654198 b. Basic Custom Duty (BCD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 5th April, 2009 XXX FOB/CIF CIF Bill of Entry No. and date XXX Dated Item Qty. (Kgs.) Rate per unit Bill Value $ ($ = ₹ 51.15) H Melt 300 $ 7.70 $2310 118157 Amount (Rs.) Assessable value B/E(101% of value) 119338 Basic Custom Duty 20.00% 23868 Education cess on BCD 2% 477 Secondary and Higher Education cess on BCD 1% 239 CVD (on AV +BCD) 8% 11456 Education cess on CVD 2% 229 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... US Dollar = ₹ 44) Market rate published by RBI, Date of dispatch of Documents 2nd Dec XXXX (Rs 45 per $ as per market rate published by RBI) Date of receipt of Documents 6th Dec XXXX (Rs 43 per $) Date of payment by the Bank 8th Dec XXXX (Rs 42 per $ used by the Bank in India) The cost of materials will be taken @ ₹ 45 per US$ being the date of dispatch of documents. The rate used by their bank for debit is the market rate at the time of conversion within a day which need not tally with the published rate. The difference between ₹ 45 and ₹ 42 per $ will be considered in financial accounts as under: Us $ 150000 @ 45 per $= ₹ 6750000 US $ 150000 @42 per $ = ₹ 6300000 The short / (gain) of ₹ 450000 will be credited to exchange rate fluctuations / adjustment account. It does not form part of material cost. The bank charges are in the nature of Administrative Overheads and will not form part of material cost. Annexure VI Illustration on FIFO/LIFO/Weighted average method of issue of material The following is the receipts and issues of January 2009: Date Receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 100 4 400 500 6 3000 600 3400 18-1-09 400 6 2400 100 4 400 100 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7200 Wheel Assembly Rear No. 2 3230 6460 2(b) Indigenous Injection pump No. 1 18500 18500 Tyres No. 5 3000 15000 Battery No. 1 7500 7500 3 Others constituting less than 5% of the Total material cost 175000 4 Total 251060 Annexure VIII-b Illustration of presentation of material cost Process Industry (Paper) S.No. Description Unit Qty Rate Amount A Direct Material Raw material 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbonate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.5 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed only for the purpose of the decision making 4 . 4.6 Materials: 4.6.1 Direct Materials: Materials the costs of which can be attributed to a cost object in an economically feasible way 5 . 4.6.2 Indirect Materials: Materials, the costs of which cannot be directly attributed to a particular cost object 6 . 4.7 Material Cost: The cost of material of any nature used for the purpose of production of a product or a service 7 . 4.8 Production overheads: Indirect costs involved in the production process or in rendering service 8 . 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 material 9 . 4.10 Standard Cost: A predetermined norm applied as a scale of reference for assessing actual cost, whether these are more or less. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res and/or insurance spares, whether procured with the equipment or subsequently, shall be amortised over a period, not exceeding the useful life of the equipment. 5.1.5 Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall be absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from disposal. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 laid under Paragraph 5. 6.1.2 Where the material costs are not directly traceable to the cost object, these may be assigned on a suitable basis like technical estimates. 6.2 Assignment of costs Direct Expenses 6.2.1 Where a material is processed or part 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 catal ..... 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