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TMI BlogGUIDANCE NOTE ON COST ACCOUNTING STANDARD ON PACKING MATERIAL COST (CAS-9)X X X X Extracts X X X X X X X X Extracts X X X X ..... ost accounting records in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute, to the extent these are found to be relevant and applicable. The above Rules further provides 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 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 Cost Accounting Standards issued by the Institute to the extent these are found to be relevant and applicable. The Cost Accounting Standards have been set in bold italic type. Numbering of standard h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the product to be packed. Illustrative list of packing material used is at Annexure I. It varies from industry to industry as items to be packed will be different as indicated in Annexure II. Packing Material is classified under a common designation on the basis of similarities of nature, attribute, source of supply and the like. For example Wooden crates, Aluminium foil, paper bag, gunny bags, HDPE bags, Glass, plastic bottles, closures (metal/plastic rubber) and the like. On the basis of source of supply, packing materials are classified as indigenous materials/imported materials. Indigenous packing materials are manufactured within the country and imported packing materials are purchased from other countries. For the purpose of this standard Packing Materials are classified into primary and secondary packing materials. Primary Packing Material are for holding the product, keeping the contents clean, fresh, sterile and safe for the intended shelf life and sale. Primary packing material required for a product will depend upon the type of the product to be packed. For example for pharmaceutical industry primary packing material will be insertion related to product, Blister s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyee cost. 4.6 Direct Materials: Materials the costs of which can be attributed to a cost object. 4.7 Distribution Overheads: Distribution overheads, also known as Distribution Cost, are the costs incurred in handling a product from the time it is ready for despatch until it reaches the ultimate consumer. 4.8 Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. 4.9 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose. 4.10 Marketing overheads: Marketing Overheads comprises selling overheads and distribution overheads. 4.11 Packing Materials: Materials used to hold, identify, describe, store, protect, display, transport, promote and make the product marketable and communicate with the consumer. 4.11.1 Defectives: Packing materials that do not meet quality standards. This may include reworks or rejects. 4.11.1.1 Reworks: Defectives which can be brought up to the standards by putting in additional resources. 4.11.1.2 Rejects: Defectives which cannot meet the quality standards even after putting in additional resources. 4.11.2 Packing Material Cost: The cost of material of any nature used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement are to be taken into account while valuing the receipt of packing material if these can be quantified with reasonable accuracy at the time of receipt. If any of these items of expenditure cannot be quantified with reasonable accuracy, these are treated as material handling cost, an item of overhead. Trade/cash discount, rebates, taxes and duties refundable (or to be credited by the taxing authorities) are to be set off. Examples of taxes and duties to be deducted from cost are CENVAT credits, credit for countervailing customs duty, sales tax set off/VAT credits and other similar items of credit recovered/recoverable. Imported Packing Material: Packing Materials are imported from other countries depending upon the availability in the country/economics of import. Import license may be required in certain cases. Terms of Purchase inter alia may be FOB, CIF port/airport. FOB (Free on Board) means that goods are loaded on the ship and there is no additional charge relating to loading and the like. Purchaser has to pay transit insurance and freight from place of loading to its destination. In case of CIF (Cost, Insurance & Freight) price, price includes besides basic price, tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs up to works/factory gate If handling cost is specific and handled singly, it is to be assigned to the packing material handled. If employees are used for handling the packing material, it is to be treated as procurement overheads and not included in Packing Material Cost. In other cases where handling charges are included in the carrier's responsibility, there will be no assignable cost due to handling. Incoming Inspection If the packing material calls for inspection by a third party, specific cost will be assigned to the packing material inspected. If the inspection is carried out internally with own employees, it is to be treated as procurement overheads and not included in Packing Material Cost. If the inspection is part of the vendor's responsibility, no separate inspection cost will be assigned. Other cost incurred for packing material acquisition is insuring of packing material. If insurance premium is specific and insured singly, it is to be assigned to the specific packing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with and charged to a cost object. Direct Employees engaged in the manufacturing of packing material are to be identified. Remuneration paid to them and share of other employee related cost are to be determined as per Standard CAS-7 on Employee cost. Direct Expenses specifically identifiable with the production of packing material (for example job charges, hire charges for use of specific equipment, cost of special designing of packing material or drawings etc.) shall form part of the cost of self manufactured packing material. Factory 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. these are the indirect costs incurred in the production process or in rendering service. The Factory overheads includes administration cost relating to production, factory or manufacturing. 5.1.4 The valuation of captive consumption of packing materials shall be in accordance with paragraph 5 of Cost Accounting Standard 4. Para 5 of the Cost Accounting Standard on Cost of Production for Captive Consumption (CAS-4) deals with the determination of cost production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Illustrations are: ♦ Demurrages levied by transporter for not removing goods, ♦ Penalties for keeping hazardous goods in unauthorized places in transit without proper safeguards. ♦ Penalties or interest levied by custom authorities for delayed clearance. Demurrage and penalties are abnormal cost and are not part of the packing material cost. It is taken to reconciliation. 5.1.8 Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to packing material shall be reduced for ascertainment of the cost to which such amounts are related. Subsidy and grant received should be recognized on a systematic basis. These should be matched with the related cost for which these are intended to compensate. Subsidy received for any packing material is to be reduced from the packing material cost. Subsidy receivable for using specific packing materials produced on account of environmental reasons shall be adjusted against the packing material cost. 5.2. Principle of valuation of issue of packing material: Issues shall be valued using appropriate assumptions on cost flow. The CAS-9 provides for adopting any one of the following three methods for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is relevant for decision making purpose viz whether to use reusable packing material or not. This will not form part of the packing material cost. But if any excisable goods produced is used for captive consumption, its cost is to be determined as per CAS-4. Under CAS-4 in case packing material is supplied free of cost by the user of the captive product the landed cost of such material shall be included in the cost of production. 5.5 Where packing materials are accounted at standard cost, the price variances related to such materials shall be treated as part of packing material cost and the portion of usage variances due to normal reasons shall be treated as part of packing material cost. Usage variances due to abnormal reasons shall be treated as part of abnormal 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 variance is placed. Standard costs are used to compare the actual costs with the standard cost with a view to determine the variances, if any, analyse the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation. Such an aberration is avoided to understand the cost in a better perspective for any purpose. For instance, loss of packing material due to major fire accident is to be treated as Abnormal Cost. It shall not form part of cost of the packing material consumed as not to distort the cost due to abnormal reasons. It is dealt with in the reconciliation with financial accounts. 5.8 The credits/recoveries in the nature of normal scrap arising from packing materials if any, should be deducted from the total cost of packing materials to arrive at the net cost of packing materials. Normal Loss occurs in use of different packing material such as in cutting wood and cardboard to make box and crate. Adjustment shall be made to the cost of packing material for credits/recoveries from sale of such scrap. CHAPTER 4 ASSIGNMENT OF COST 6.1 Assignment of packing material costs to cost objects: Packing material costs shall be directly traced to a cost object to the extent it is economically feasible. Assignment of packing material cost involves establishing a suitable procedure to identify and record the packing material consumed by the cost object. Cost object includes a product, servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach product is stored either as part of the standard bill of materials relating to the product or in a separate bill of packing materials. Packing material cost may also be assigned on the basis of standard bill of packing material in place of actual issues. Under this method packing material is issued as Standard Bill of material. The standard cost for each item of packing material is defined at the beginning of the year. The variances from standard on account of price and consumption are adjusted to consumption at suitable interval. Any variation between the actual issues (both quantity and value) and the standard as accumulated over the period is charged off to consumption. For tracing of packing material cost direct to a cost object, concept of "to the extent economic feasible" is also to be taken into account. This requires an exercise to analyse the cost involved, benefit to accrue and over-riding requirement to identify packing material with the object. 6.2 Where the packing material costs are not directly traceable to the cost object, these may be assigned on the basis of quantity consumed or similar measures like technical estimates. Packing Material Costs wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or this activity shall identified and forms part of the packing material cost. 6.4 Cost of primary packing materials shall form part of the cost of production. Primary packing material has been defined under paragraph 4.11 of the CAS-9. These materials are essential to hold the product and bring it to a condition in which it can be used by or sold to a customer. Primary packing materials are of various types and their use varies with industry to industry. For example: - Pharmaceutical industry: Insertions related to product, Foils for strips of tablets/capsules, vials. - Industrial gases: Cylinders/bottles used for filling the gaseous products. The cost of primary packing material used for a product shall form part of the cost of production. 6.5 Cost of secondary packing materials shall form part of distribution overheads. Secondary Packing material has been defined under paragraph 4.11.6. These are: (a) The packing material used for storing and transport from factory to customer/warehouse for further distribution to marketing agents. For example I. Cartons holding strips of tablets and card board boxes used for holding cartons; II. cartons containing packs of biscuits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Box, carton and the like is to be indicated. CHAPTER 6 DISCLOSURES 8.1 The cost statements shall disclose the following: 8.1.1 The basis of valuation of Packing Materials. The standard provides various methods of valuation of issues of Packing material such as FIFO, LIFO and weighted average. Method adopted for valuation of packing material cost shall be disclosed in the cost statement. For example: Basis of valuation of packing material cost: Periodic quarterly weighted average is used for pricing the issues of packing material. 8.1.2 Where Packing Materials Cost is disclosed at standard cost, the price and usage variances. In case issue of packing material is valued at standard cost, the cost statement shall disclose the standard cost and variance thereof. 8.1.3 The cost and price of Packing Materials received from /supplied to related parties. If any packing material is procured from or supplied to related parties, (as defined under the Companies Act 1956) name & address of the party, name of the packing material, nature of transaction, quantity, transfer price, amount, normal price and basis adopted for determining normal price are to be disclosed. The objective o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, and methods applied for the measurement and assignment of cost of packing material are to be applied consistently between one period to subsequent period and uniformly applied for different packing material. If any change is made in these principles and methods which results in material effect on the cost of packing material, the same shall be disclosed in the cost statement or by a foot note. In case the impact of change in principles and methods of cost accounting is not scertainable, the fact is to be disclosed by a foot note to the cost statements. 8.3 Disclosures shall be made only where material, significant and quantifiable. Level of materiality and significance has not been stated in the standard. Material and significance of any information will be different from situation to situation. If material, the same is to be disclosed. The following criteria can be applied for determining the materiality. No one criterion is determinative in and of itself. ♦ The absolute amount - the larger the amount, the more likely that it is material ♦ The amount of cost of a cost object compared to the amount of packing material cost under consideration - the greater the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts where tamper-protection is a high priority, such as CDs or DVDs. After the item is wrapped, heat is applied to make the wrap shrink to fit. Because it creates such a tight seal and keeps moisture out, shrink wrap can also be used to package perishable food items. Bubble Wrap Bubble wrap is common due to its effectiveness at protecting fragile items without adding significant weight or cost. For small items or those that require additional protection, the bubble wrap can simply be overlapped to provide several layers of cushioning. Tissue Paper Tissue paper is used inside a container to fill empty space so that the packed items do not shift in transit. Fragile contents like glass or porcelain are often wrapped in tissue paper before being placed inside another type of protective container for shipping. Poly Bags, Tubes & Sheets Poly Wrappers in custom Sizes & Thickness plastic wrappers, films and sheet PVC- Polyvinyl chloride Food trays, cling film, bottles for squash, mineral water and shampoo. HDPE - High-density polyethylene Bottles for milk and washing-up liquids. Polyethylene terephthalate Fizzy drink bottles and oven-ready meal trays. LDPE - Low density poly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antity (Unit) Rate/Unit Amount Cost Per unit Material Cost Employee cost Primary packing Cost (a) Primary packing material • imported • indigenous (b) Other expenses • Production Overhead Production cost (after adjustment of WIP) Secondary Packing Cost: Cartoons (indigenous) Card Boxes (imported) Selling Expenses ANNEXURE IV (CAS 9) COST ACCOUNTING STANDARD ON PACKING MATERIAL COST The following is the COST ACCOUNTING STANDARD - (CAS - 9) issued by the Council of The Institute of Cost and Works Accountants of India on "PACKING MATERIAL COST", for comments. 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 Packing Material Cost. 1.2 This standard deals with the principles and methods of classification, measurement and assignment of Packing Material Cost, for determination of the cost of product, and the presentation and disclosure in cost statements. 1.3 Packing Materials for the purpose of this standard are classifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o customers etc. ♦ Clearing and forwarding charges ♦ Cost of mending or replacing packing materials at distribution point. 4.8 Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. This will include interest and commitment charges on bank borrowings, other short term and long term borrowings, amortisation of discounts or premium related to borrowings, amortisation of ancillary cost incurred in connection with the arrangements of borrowings, finance charges in respect of finance leases, other similar arrangements and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to the interest costs7. The terms Finance costs and Borrowing costs are used interchangeably. 4.9 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose.8 For example: packing material supplied by the customer. 4.10 Marketing overheads: Marketing Overheads comprises selling overheads and distribution overheads. 4.11 Packing Materials: Materials used to hold, identify, describe, store, protect, display, transport, promote and make the product marketable and communic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. 4.14 Selling Overheads: Selling Overheads, also known as Selling Costs, are the expenses related to sale of products and include all Indirect Expenses in sales management for the organization.14 4.15 Standard Cost: A predetermined cost of resource inputs for the cost object computed with reference to set of technical specifications and efficient operating conditions.15 Standard costs are used as scale of reference 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. Standard costs are also used for estimation. 5. Principles of Measurement 5.1 Principle of valuation of receipts of packing material: 5.1.1 The packing material receipts should be valued at purchase price including duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited) that can be quantified at the time of acquisition. Examples of taxes and duties to be deducted from cost are CENVAT credits, credit for countervailing customs duty, sales tax set off/vat credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounted at standard cost, the price variances related to such materials shall be treated as part of packing material cost and the portion of usage variances due to normal reasons shall be treated as part of packing material cost. Usage variances due to abnormal reasons shall be treated as part of abnormal cost. 5.6 The normal loss arising from the issue or consumption of packing materials shall be included in the packing materials cost. 5.7 Any abnormal cost where it is material and quantifiable shall be excluded from the packing material cost. 5.8 The credits/recoveries in the nature of normal scrap arising from packing materials if any, should be deducted from the total cost of packing materials to arrive at the net cost of packing materials. 6. Assignment of Cost 6.1 Assignment of packing material costs to cost objects: Packing material costs shall be directly traced to a cost object to the extent it is economically feasible. 6.2 Where the packing material costs are not directly traceable to the cost object, these may be assigned on the basis of quantity consumed or similar measures like technical estimates. 6.3 The packing material cost of reusable packing shall be ass ..... 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