For Cost Accounting Standard issued by ICWAI
For Accounting Standards issued by ICAI
Cost Accounting Standard 5
Cost Accounting Standard 5
ON DETERMINATION OF
AVERAGE (EQUALIZED) COST OF TRANSPORTATION
The following is the text of the Cost Accounting Standard 5 (CAS-5) issued by the Council
of the Institute of Cost & Works Accountants of India on “Determination of Average
(Equalized) Cost of Transportation”. This standard deals with the determination of average
transportation cost of a product. In this standard the standard portions have been set in bold
italic type. These are to be read in the context of the background material which has been set
in the normal type.
1. Introduction:
1.1 The cost accounting principles for tracing/identifying an element of cost, its
allocation/apportionment to a product or service are well established. Transportation
cost is an important element of cost for procurement of materials for production and
for distribution of product for sale. Therefore, Cost Accounting Records should present
transportation cost separately from the other cost of inward materials or cost of sales of
finished goods. The Finance Act 2003 also specifies the certification requirement of
transportation cost for claiming deduction while arriving at the assessable value of
excisable goods cleared for home consumption/ export. There is a need to standardize
the record keeping of expenses relating to transportation and computation of
transportation cost.
2. Objective
2.1 To bring uniformity in the application of principles and methods used in the
determination of averaged/equalized transportation cost.
2.2 To prescribe the system to be followed for maintenance of records for collection of
cost of transportation, its allocation/apportionment to cost centres, locations or
products.
For example, transportation cost needs to be apportioned among excisable, exempted,
non-excisable and other goods for arriving at the average of transportation cost of
each class of goods.
2.3 To provide transparency in the determination of cost of transportation.
3. Scope
3.1 This standard should be applied for calculation of cost of transportation required
under any statute or regulations or for any other purpose. For example, this standard
can be used for :
(a) determination of average transportation cost for claiming the deduction for
arriving at the assessable value of excisable goods
(b) Insurance claim valuation
(c) Working out claim for freight subsidy under Fertilizer Industry Coordination
Committee (d) Administered price mechanism of freight cost element
(e) Determination of inward freight costs included or to be included in the cost of
purchases attributable to the acquisition.
(f) Computation of freight included in the value of inventory for accounting on
inventory or valuation of stock hypothecated with Banks / Financial Institution,
etc.
4. Definitions
The following terms are used in this standard with the meaning specified :
4.1 Cost of Transportation comprises of the cost of freight, cartage, transit insurance and
cost of operating fleet and other incidental charges whether incurred internally or
paid to an outside agency for transportation of goods but does not include detention
and demurrage charges.
Explanation :
Cost of transportation is classified as inward transportation cost and outward
transportation Cost.
4.2 Inward Transportation cost is the transportation expenses incurred in connection with
materials /goods received at factory or place of use or sale/removal.
4.3 Outward Transportation cost is the transportation expenses incurred in connection
with the sale or delivery of materials or goods from factory or depot or any other
place from where goods are sold /removed
4.4 Freight is the charges paid or payable to an outside agency for transporting materials/
goods from one place to another place.
4.5 Cartage is the expenses incurred for movement of goods covering short distance for
further transportation for delivery to customer or storage.
4.6 Transit insurance cost is the amount of premium to be paid to cover the risk of loss
/damage to the goods in transit.
4.7 Depot is the bounded premises /place managed internally or by an agent, including
consignment agent and C & F agent, franchisee for storing of materials/goods for
further dispatch including the premises of Consignment Agent and C&F Agent for the
purpose .
Depot includes warehouses, go-downs, storage yards, stock yards etc.
4.8 Equalized transportation cost means average transportation cost incurred during a
specified period.
4.9 Equalized freight means average freight. 5. Maintenance of records for ascertaining Transportation Cost
5.1 Proper records shall be maintained for recording the actual cost of transportation
showing each element of cost such as freight, cartage, transit insurance and others
after adjustment for recovery of transportation cost. Abnormal costs relating to
transportation, if any, are to be identified and recorded for exclusion of
computation of average transportation cost.
5.2 In case of a manufacturer having his own transport fleet, proper records shall be
maintained to determine the actual operating cost of vehicles showing details of
various elements of cost, such as salaries and wages of driver, cleaners and others,
cost of fuel, lubricant grease, amortized cost of tyres and battery, repairs and
maintenance, depreciation of the vehicles, distance covered and trips made, goods
hauled and transported to the depot.
5.3 In case of hired transport charges incurred for despatch of goods, complete details
shall be recorded as to date of despatch, type of transport used, description of the
goods, destination of buyer, name of consignee, challan number, quantity of goods
in terms of weight or volume, distance involved, amount paid, etc.
5.4 Records shall be maintained separately for inward and outward transportation cost
specifying the details particulars of goods despatched, name of supplier / recipient,
amount of freight etc.
5.5 Separate records shall be maintained for identification of transportation cost
towards inward movement of material (procurement) and transportation cost of
outward movement of goods removed /sold for both home consumption and export.
5.6 Records for transportation cost from factory to depot and thereafter shall be
maintained separately.
5.7 Records for transportation cost for carrying any material / product to job-workers
place and back should be maintained separately so as include the same in the
transaction value of the product.
5.8 Records for transportation cost for goods involved exclusively for trading activities
shall be maintained separately and the same will not be included for claiming any
deduction for for calculating assessable value excisable goods cleared for home
consumption.
5.9 Records of transportation cost directly allocable to a particular category of products
should be maintained separately so that allocation in appendix –3 can be made. 5.10 For common transportation cost, both for own fleet or hired ones, proper records
for basis of apportionment should be maintained.
5.11 Records for transportation cost for exempted goods, excisable goods cleared for
export shall be maintained separately.
5.12 Separate records of cost for mode of transportation other than road like ship, air
etc are to be maintained in appendix –2 which will be included in total cost of
transportation. 6. Treatment of cost:
6.1 Inward transportation costs shall form the part of the cost of procurement of
materials which are to be identified for proper allocation/ apportionment to the
materials / products.
6.2 Outward transportation cost shall form the part of the cost of sale and shall be
allocated / apportioned to the materials and goods on a suitable basis.
Explanation :
Outward transportation cost of a product from factory to depot or any location of sale
shall be included in the cost of sale of the goods available for sale.
6.3The following basis may be used, in order of priority, for apportionment of outward
transportation cost depending upon the nature of products, unit of measurement
followed and type of transport used :
i) Weight
ii) Volume of goods
iii) Tonne-Km
iv) Unit / Equivalent unit
v) Value of goods
vi) Percentage of usage of space
Once a basis of apportionment is adopted , the same should be followed consistently.
6.4 For determining the transportation cost per unit, distance shall be factored in to arrive
at weighted average cost.
6.5 Abnormal and non recurring cost shall not be a part of transportation cost.
Explanation
Penalty, detention charges, demurrage and cost related to abnormal break down will
not be included in transportation cost.
7. Cost Sheet
The cost sheets shall be prepared and presented in a form as per Appendices 1,2 and 3 or
as near thereto. Appendix 1 and Appendix 2 show the details of information to be
maintained for compilation of transport cost for own fleet and hired transportation charges
respectively. Appendix 1 is applicable where the organization is having its own fleet.
The directly allocable cost of own fleet ( outward) shall be identified against different
categories of products as shown in Appendix 3 and same shall be indicated there.
Similarly, total common cost of own fleet ( outward) shall be apportioned to different
categories of products as shown in Appendix 3 on a basis which should be specified. The
basis of apportionment may be adopted depending on the nature of product as indicated in
para 6.3. Similar approach shall also be applied for hired outward transport charges. More columns may be required to be shown in Appendix 3 specifying different types of
transactions. For example: Sale on specific rate basis, sale of waste, scrap, return from
customer, goods sent for job work, goods received after job work etc.
Unit of Measurement (UM) may vary depending upon the nature of the product. For
example, Number, MT, Meter, Litre etc.
Proper records shall be maintained to show separately the Transportation Cost relating to
sending of jobs to job contractors/convertors and receipt back of processed jobs/converted
materials.
An enterprise shall be required to maintain cost records and other books of account in a
manner which would facilitate preparation and verification of cost of transportation and
other related charges and its apportioning to various products.
8. Transaction value :
‘Transaction value’ shall have the meaning assigned to it in Section 4 of The Central
Excise Act, 1944 or Section 14 of The Customs Act , 1962 or as defined in any other Act or
Regulations as the case may be.
9. The standard will be operative from the date of issue.
Finalized by CASB-WTO Committee on 20July2005 and circulated to the Council at its meeting on 21 July 2005 (1
st
draft was published in June 2002 journal)Appendix 1
Name of the Manufacturer:
Address of the Manufacturer:
Statement of Operating Cost of own Fleet for the period…….
Sl No
A QUANTITATIVE INFORMATION
A1 Number of Vehicles
A2 Number of trips
A3 Goods Transported – inward (UM)
A4. Goods transported – outward (UM)
A5. Goods transported – inward – Km
A6. Goods transported – outward – Km
A7. Total Goods transported inward – basis of apportionment ( Specify)
A8. Total Goods transported outward – basis of apportionment ( Specify)
A9 Total ( A7+A8)
B COST INFORMATION (Rs)
Cost of Operation
Variable Cost
B1. Salaries & Wages of Drivers, Cleaners and others
B2. Fuel & Lubricants
B3. Consumables
B4. Amortized cost of Tyre, Tube & Battery
B5. Spares
B6. Repair & Maintenance
B7. Other Variable Cost ( specify)
B8. Total Variable Cost ( B1 to B7)
Fixed Cost
B9. Insurance
B10. Licence Fee, Permit Fee and Taxes
B11. Depreciation
B12. Other Fixed Costs ( Specify)
B13. Total Fixed Cost ( B9 to B12)
B14. Total Operating Cost (B8+B13)
C APPORTIONMENT ( Basis to be specified) - usage
C1. Inward Transport Cost ( B14 *A7/ A9)
C2. Outward Transport Cost (B14 *A8/A9)
C3. Transit insurance for inward movement
C4. Transit insurance for outward movement
C5. Total transportation cost for inward movement (C1+C3)
C6. Total transportation cost for outward movement (C2+C4)
Note :
1. Cost of Battery, and Tyres and Tubes shall to be amortised over its useful life.
2. Asset Register shall be maintained for determination of depreciation and amortization cost.
3. Separate Cost Sheet shall be prepared for different types of vehicles. Appendix 2
Name of the Manufacturer:
Address of the Manufacturer:
Statement of Hired Outward Transportation Cost for the period ending…….
A Quantitative Information
A1 Quantity of goods transported – outward (UM)
B COST INFORMATION ) (Rs)
B1 Hired Transport Charges
B2 Transit Insurance
B3 Other ( specify)
B4 Total Transportation cost ( B1 to B3) Name of the Manufacturer: Appendix -3
Address of the Manufacturer:
Statement of apportionment of Outward Transportation Cost to different goods and Determination of Averaged Outward Transport Cost for the period ending…….
A Quantitative Information Total Excisable goods Specific
Rated
goods
Goods
cleared for
Export
Exempted
goods
Goods
Cleared
on MRP
Basis
Goods
cleared
from
factory to
customer
Goods
cleared
from
Depot to
Customer
Others
( specify)
Productgroup 1
Product
group 2
Product
group 3
A1 Goods transported Outwards( UM *)
A2 Goods Transported Outward ( KM)
B Outward Transport Cost ( Rs)
B1 Directly allocated own fleet
transportation cost (Rs)
B2 Basis of Apportionment of own fleet
cost ( Specify)
B3 Common own fleet transport cost to be
apportioned
B4 Directly allocated hired transportation
charges (Rs)
B5 Basis of Apportionment of hired
transportation cost ( Specify)
B6 Common hired transport charges to be
apportioned
B7 Total Transport Cost
( B1+ B3+B4+B6)
B8 Averaged transport cost per unit ( Rs)
(B7/A1)
* UM is the Unit of measurement
Seal and signature of Company’s authorized representative
I /We, have verified above data and calculation in the appendix 1, 2 and 3 on test check basis with reference to the books of account, cost accounting records and other records. Based on the
information and explanations given to me/us, and on the basis of generally accepted cost accounting principles and practices followed by the industry, I /We certify that the above cost data reflect
true and fair view of averaged transport cost.
Date :
Place :
Seal & Signature of Cost Accountant
Membership No.
Cost Accounting Standard 4
Cost Accounting Standard 4
1COST ACCOUNTING STANDARD ON
COST OF PRODUCTION FOR CAPTIVE CONSUMPTION
The following is the text of the COST ACCOUNTING STANDARD 4 (CAS-4) issued by the
Council of the Institute of Cost and Works Accountants of India on “Cost of Production for Captive
Consumption”. The standard deals with determination of cost of production for captive consumption.
In this Standard, the standard portions have been set in bold italic type. These should be read in the
context of the background material which has been set in normal type.
1. Introduction
The Cost Accounting principle for determination of cost of production is well established. Similarly,
rules for levy of excise duty on goods used for captive consumption are also well defined. Captive
Consumption means the consumption of goods manufactured by one division and consumed by
another division(s) of the same organization or related undertaking for manufacturing another
product(s). Liability of excise duty arises as soon as the goods covered under excise duty are
manufactured but excise duty is collected at the time of removal or clearance from the place of
manufacture even if such removal does not amount to sale. Assessable value of goods used for
captive consumption is based on cost of production. According to the Central Excise Valuation
(Determination of Price of Excisable Goods) Rules 2000, the assessable value of goods used for
captive consumption is 115% of cost of production of such goods, and as may be prescribed by the
Government from time to time.
2. Objective
2.1 The purpose of this standard is to bring uniformity in the principles and methods used for
determining the cost of production of excisable goods used for captive consumption.
2.2 The cost statement prepared based on standard will be used for determination of assessable
value of excisable goods used for captive consumption.
2.3 The standard and its disclosure requirement will provide better transparency in the valuation
of excisable goods used for captive consumption.
3. Scope
3.1 The standard is to be followed for determining the cost of production to arrive at an
assessable value of excisable goods used for captive consumption.
3.2 Cost of production will include various cost components. They are already defined in Cost
Accounting Standard-1 (‘ Classification of Cost’ – CAS-1). Thus, this standard has to be read
in conjunction with CAS-1. 2
4. Definitions
4.1 Cost of Production : Cost of production shall consist of Material Consumed, Direct Wages
and Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research and
Development Cost , Packing cost, Administrative Overheads relating to production.
To arrive at cost of production of goods dispatched for captive consumption, adjustment
for Stock of work-in-Process, finished goods, recoveries for sales of scrap, wastage etc
shall be made.
4.2 Captive Consumption : Captive Consumption means the consumption of goods
manufactured by one division or unit and consumed by another division or unit of the
same organization or related undertaking for manufacturing another product(s).
4.3 Normal Capacity is the production achieved or achievable on an average over a period or
season under normal circumstances taking into account the loss of capacity resulting from
planned maintenance. (CAS-2)
5. Determination of Cost of Production for Captive Consumption
To determine the cost of production for captive consumption, calculations of different cost
components and adjustments are explained below :
5.1 Material Consumed
Material Consumed shall include materials directly identified for production of goods
such as :
(a) indigenous materials
(b) imported materials
(c) bought out items
(d) self manufactured items
(e) process materials and other items
Cost of material consumed shall consist of cost of material, duties and taxes, freight
inwards, insurance, and other expenditure directly attributable to procurement. Trade
discount, rebates and other similar items will be deducted for determining the cost of
materials. Cenvat credit, credit for countervailing customs duty, Sales Tax set off, VAT,
duty draw back and other similar duties subsequently recovered/ recoverable by the
enterprise shall also be deducted.
5.2 Direct wages and salaries
Direct wages and salaries shall include house rent allowance, overtime and incentive
payments made to employees directly engaged in the manufacturing activities.
Direct wages and salaries include fringe benefits such as :
(i) Contribution to provident fund and ESIS
(ii) Bonus/ ex-gratia payment to employees
(iii) Provision for retirement benefits such as gratuity and superannuation
(iv) Medical benefits
(v) Subsidised food
(vi) Leave with pay and holiday payment 3
(vii) Leave encashment
(viii) Other allowances such as children’s education allowance, conveyance allowance
which are payable to employees in the normal course of business etc.
5.3 Direct Expenses
Direct expenses are the expenses other than direct material cost and direct employees costs
which can be identified with the product.
Direct expenses include :
(i) Cost of utilities such as fuel, power, water, steam etc
(i) Royalty based on production
(ii) Technical Assistance / know –how fees
(iii) Amortized cost of moulds, patterns, patents etc
(iv) Job charges
(v) Hire charges for tools and equipment
(vi) Charges for a particular product designing etc.
5.4 Works Overheads
Works overheads are the indirect costs incurred in the production process.
Works overheads include the following expenses:
(i) Consumable stores and spares
(ii) Depreciation of plant and machinery, factory building etc
(iii) Lease rent of production assets
(iv) Repair and maintenance of plant and machinery, factory building etc
(v) Indirect employees cost connected with production activities
(vi) Drawing and Designing department cost.
(vii) Insurance of plant and machinery, factory building, stock of raw material & WIP etc
(viii) Amortized cost of jigs, fixtures, tooling etc
(ix) Service department cost such as Tool Room, Engineering & Maintenance, Pollution
Control etc
5.5 Quality Control Cost
The quality control cost is the expenses incurred relating to quality control activities for
adhering to quality standard. These expenses shall include salaries & wages relating to
employees engaged in quality control activity and other related expenses. 4
5.6 Research and Development Cost
The research and development cost incurred for development and improvement of the
process or the existing product shall be included in the cost of production.
5.7 Administrative Overheads
Administrative overheads needs to be analysed in relation to production activities and
other activities. Administrative overheads in relation to production activities shall be
included in the cost of production. Administrative overheads in relation to activities other
than manufacturing activities e.g. marketing, projects management, corporate office
expenses etc. shall be excluded from the cost of production.
5.8 Packing Cost
If product is transferred/dispatched duly packed for captive consumption, cost of such
packing shall be included.
Packing cost includes both cost of primary and secondary packing required for transfer/
dispatch of the goods used for captive consumption.
5.9 Absorption of overheads
Overheads shall be analysed into variable overheads and fixed overheads.
Variable Overheads are the items which change with the change in volume of production,
such as cost of utilities etc.
Fixed overheads are the items whose value do not change with the change in volume of
production such as salaries, rent etc.
The variable production overheads shall be absorbed in production cost based on actual
capacity utilisation.
The fixed production overheads and other similar item of fixed costs such as quality
control cost, research and development costs, administrative overheads relating to
manufacturing shall be absorbed in the production cost on the basis of the normal
capacity or actual capacity utilization of the plant, whichever is higher.
5.10 Valuation of Stock of work-in-progress and finished goods
Stock of work-in-progress shall be valued at cost on the basis of stages of completion as
per the cost accounting principles. Similarly, stock of finished goods shall be valued at
cost. Opening and closing stock of work-in-progress shall be adjusted for calculation of
cost of goods produced and similarly opening and closing stock of finished goods shall
be adjusted for calculation of goods despatched.
In case the cost of a shorter period is to be determined, where the figures of opening and
closing stock are not readily available, the adjustment of figures of opening and closing stock
may be ignored. 5
5.11 Treatment of Joint Products and By-Products
A production process may result in more than one product being produced simultaneously.
In case joint products are produced, joint costs are allocated between the products on a
rational and consistent basis. In case by-products are produced, the net realisable value of
by-products is credited to the cost of production of the main product.
For allocation of joint cost to joint products, the sales values of products at the split off point
i.e. when the products become separately identifiable may become the basis. Some other
basis may be adopted. For example, in case of petroleum products, each product is assigned
certain value based on its certain properties, may be calorific value and these values become
the basis of apportionment of joint cost among petroleum products.
5.12 Treatment of Scrap and Waste
The production process may generate scrap or waste. Realized or realizable value of scrap
or waste shall be credited to the cost of production.
In case, scrap or waste does not have ready market and it is used for reprocessing, the scrap
or waste value is taken at a rate of input cost depending upon the stage at which such scrap or
waste is recycled. The expenses incurred for making the scrap suitable for reprocessing shall
be deducted from value of scrap or waste.
Illustration
A production process has three stages.
Stage Input material cost Processing cost Total
( Rs/ MT) ( Rs/MT) ( Rs/MT)
1 2000 500 2500
2 2500 1000 3500
3 3500 1000 4500
If during the production process at stage3, the scrap is produced and the same is recycled at
stage2 after making an expenditure of Rs 200 per MT to make it suitable for re-processing
at stage2, then scrap will be valued @ Rs ( 2500 – 200 ) i.e Rs 2300. If no expenditure is
involved to make scrap re-usable, the scrap value will be @ Rs 2500. The scrap value for the
scrap produced during a period calculated at the rate as explained above may be deducted to
find out the cost of production for the period.
5.13 Miscellaneous Income
Miscellaneous income relating to production shall be adjusted in the calculation of cost
of production, for example, income from sale of empty containers used for despatch of
the captively consumed goods produced under reference.
5.14 Inputs received free of cost 6
In case any input material, whether of direct or indirect nature, including packing
material is supplied free of cost by the user of the captive product, the landed cost of such
material shall be included in the cost of production.
5.15 Moulds, Tools, Dies & Patterns etc received free of cost
The amortization cost of such items shall be included in the cost of production.
5.16 Interest and financial charges
Interest and financial charges being a financial charge shall not be considered to be a
part of cost of production.
5.17 Abnormal and non-recurring cost
Abnormal and non-recurring cost arising due to unusual or unexpected occurrence of
events, such as heavy break down of plants, accident, market condition restricting sales
below normal level, abnormal idle capacity, abnormal process loss, abnormal scrap and
wastage, payments like VRS, retrenchment compensation, lay-off wages etc. The abnormal
cost shall not form the part of cost of production.
6. Cost Sheet
The cost sheet should be prepared in the format as par Appendix – 1 or as near thereto as
possible. The manufacturer will be required to maintain cost records and other books of
account in a manner, which would facilitate preparation and verification of the cost of
production. For manufacturers covered under the ambit of Section 209(1)(d) of the
Companies Act, 1956, i.e., where Cost Accounting Records are statutorily required to be
maintained, the Cost Accountant certifying the cost of production for captive consumption
shall verify the correctness of the cost from these records. However, for manufacturers not
covered under Section 209(1)(d) of the Companies Act, 1956, it is desirable that they also
maintain cost accounting records in line with the records so prescribed as to facilitate
determination and certification of cost of production.
7. Disclosure
(i) If there is any change in cost accounting principles and practices during the
concerned period which may materially affect the cost of production in terms of
comparability with previous periods, the same should be disclosed.
(ii) If opening stock and closing stock of work -in-progress and finished goods are not
readily available for certification purpose, the same should be disclosed. 7
Appendix – 1
Name of the Manufacturer :
Address of the Manufacturer :
Registration No of Manufacturer :
Description of product captively consumed:
Excise Tariff Heading :
Statement of Cost of Production of _____________ manufactured / to be manufactured during the period _____________
Qty
Q1 Quantity Produced (Unit of Measure)
Q2 Quantity Despatched (Unit of Measure)
Particulars Total Cost
(Rs)
Cost/unit
( Rs)
1. Material Consumed
2. Direct Wages and Salaries
3. Direct Expenses
4. Works Overheads
5. Quality Control Cost
6. Research & Development Cost
7. Administrative Overheads (relating to production activity)
8. Total (1 to 7)
9. Add : Opening stock of Work - in –Progress
10. Less : Closing stock of Work -in- Progress
11. Total (8+9-10)
12. Less : Credit for Recoveries/Scrap/By-Products / misc income
13. Packing cost
14. Cost of production ( 11 - 12 + 13)
15. Add: Inputs received free of cost
16. Add: Amortised cost of Moulds, Tools, Dies & Patterns etc received free of cost
17. Cost of Production for goods produced for captive consumption ( 14 + 15 + 16)
18. Add : Opening stock of finished goods
19. Less : Closing stock of finished goods
20. Cost of production for goods despatched ( 17 + 18 - 19)
Seal & Signature of Company's Authorised Representative
I/We, have verified above data on test check basis with reference to the books of account, cost accounting records and other records.
Based on the information and explanations given to me/us, and on the basis of generally accepted cost accounting principles and
practices followed by the industry, I /We certify that the above cost data reflect true and fair view of the cost of production.
Date :
Place :
Seal & Signature of Cost Accountant
Membership No.8
Cost Accounting Standard 3
Cost Accounting Standard 3
COST ACCOUNTING STANDARD ON “OVERHEADS”
The following is the text of the COST ACCOUNTING STANDARD 3 (CAS- 3) issued by
the Council of the Institute of Cost and Works Accountants of India on “Overheads”. The
standard deals with the method of collection, allocation, apportionment and absorption of
overheads” In this Standard, the standard portions have been set in bold italic type. These
should be read in the context of the background material which has been set in normal type.
1. Introduction
1.1 In Cost Accounting the analysis and collection of overheads, their allocation and
apportionment to different cost centres and absorption to products or services plays an
important role in determination of cost as well as control purposes. A system of better
distribution of overheads can only ensure greater accuracy in determination of cost of
products or services. It is, therefore, necessary to follow standard practices for allocation,
apportionment and absorption of overheads for preparation of cost statements.
2. Objective
2.1 The standard is to prescribe the methods of collection, allocation, apportionment of
overheads to different cost centres and absorption thereof to products or services on a
consistent and uniform basis in the preparation of cost statements and to facilitate inter-firm
and intra-firm comparison.
2.2 The standardization of collection, allocation, apportionment and absorption of
overheads is to provide a scientific basis for determination of cost of different activities,
products, services, assets, etc.
2.3 The standard is to facilitate in taking commercial and strategic management `
decisions such as resource allocation, product mix optimization, make or buy decisions, price
fixation etc.
2.4 The standard aims at ensuring better disclosure requirement and transparency in the
cost statement.
3. Scope
3.1 The standard should be followed for treatment of overheads by all enterprises
including companies covered under Cost Accounting Records Rules issued in pursuant to
Sec 209(1)(d) of the Companies Act, 1956 or under the provisions of any other Act, Rules
and Regulations.
3.2 The standard shall be applied in Cost and Management Accounting practices relating to
(a) Cost of products, services or activities
(b) Valuation of stock
(c) Transfer pricing
(d) Segment Performance
(e) Excise / Custom duty, VAT, Income Tax, Service Tax and other levies, duties
and abatement fixation (f) Cost statements for any other purpose
4. Definitions :
4.1 Overheads – 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.
Overheads are to be classified on the basis of functions to which the overheads are
related ( Refer to ‘ Classification of cost’ – CAS-1), viz
- Production overheads
- Administrative overheads
- Selling overheads
- Distribution overheads
Overheads may also be classified on the basis of behaviour such as variable
overheads, semi-variable overheads and fixed overheads.
Variable overheads comprise of expenses which vary in proportion to the change of
volume of production. For example, cost of utilities etc.
Fixed overheads comprise of expenses whose value do not change with the change in
volume of production such as salaries, rent etc.
Semi-variable overheads are partly affected by change in the production volume.
They are further segregated into variable overheads and fixed overheads
Any items of overheads arising out of abnormal situation in business activity should
not be treated as overheads. They are charged to Costing Profit and Loss Account.
Items not related to business activities such as donation, loss / profit on sale of assets
etc are also not to be treated as overheads.
Borrowing cost and other financial charges including foreign exchange fluctuations
will not form the part of overheads.
4.2 Collection of Overheads - Collection of overheads means the pooling of indirect
items of expenses from books of account and supportive/ corroborative records in
logical groups having regards to their nature and purpose.
Overheads are collected on the basis of pre-planned groupings, called cost pools.
Homogeneity of the cost components in respect of their behaviour and character is to
be considered in developing the cost pool. Variable and fixed overheads should be
collected in separate cost pools under a cost centre. A great degree of homogeneity in
the cost pools are to be maintained to make the apportionment of overheads more
rational and scientific. A cost pool for maintenance expenses will help in apportioning
them to different cost centres which use the maintenance service.
4.3 Allocation of overheads – Allocation of overheads is assigning a whole item of cost
directly to a cost centre.
An item of expense which can be directly related to a cost centre is to be allocated to
the cost centre. For example, depreciation of a particular machine should be allocated
to a particular cost centre if the machine is directly attached to the cost centre.
4.4 Apportionment of overhead - Apportionment of overhead is distribution of overheads
to more than one cost centre on some equitable basis.
When the indirect costs are common to different cost centres, these are to be
apportioned to the cost centres on an equitable basis. For example, the expenditure on
general repair and maintenance pertaining to a department can be allocated to that
department but has to be apportioned to various machines (Cost Centres) in the
department. If the department is involved in the production of a single product, the
whole repair & maintenance of the department may be allocated to the product.
4.5 Primary and Secondary Distribution of Overheads :
In case of multi-product environment, there are common service cost centres which
are providing services to the various production cost centres and other service cost
centres. The costs of services are required to be apportioned to the relevant cost
centres. First step to be followed is to apportion the overheads to different cost
centres and then second step is to apportion the costs of service cost centres to
production cost centres on an equitable basis. The first step is termed as primary
distribution and the second step is termed as secondary distribution of overheads.
4.6 Absorption of overheads - Absorption of overheads is charging of overheads from
cost centres to products or services by means of absorption rates for each cost center
which is calculated as follows :
Total overheads of the cost centre
Overhead absorption Rate = _____________________________
Total quantum of base
The base ( denominator) is selected on the basis of type of the cost centre and its
contribution to the products or services, for example, machine hours, labour hours,
quantity produced etc.
Overhead absorbed = Overhead absorption rate x units of base in product or service
4.7 Normal Capacity is the production achieved or achievable on an average over a
period or season under normal circumstances taking into account the loss of capacity
resulting from planned maintenance. (CAS-2) 5. Apportionment and absorption of Production Overheads
5.1 Overheads are to be apportioned to different cost centres based on following two
principles :
i) Cause and Effect - Cause is the process or operation or activity and effect is the
incurrence of cost. Apportionment of overheads based on this criterion ensures
better rationality as it is guided by the relationship between cost object and cost.
ii) Benefits received – overheads are to be apportioned to the various cost centres in
proportion to the benefits received by them.
5.2 Primary Distribution of overheads :
Basis of primary apportionment of items of production overheads is to be selected to
distribute them among the cost centres following the above two principles as given
above in 5.1.
Basis of apportionment must be rational to distribute overheads. Once the base is
selected, the same is to be followed consistently and uniformly. However, change in
basis for apportionment can be adopted only when it is considered necessary due to
change in circumstances like change in technology, degree of mechanization, product
mix, etc. In case of such changes, proper disclosure in cost records is essential.
Examples of basis of primary distribution of some items of production overheads
Item of Cost Basis of Apportionment
Power
Fuel
Jigs, tools & fixtures
Crane hire charges
Supervisors’ salary & fringe benefits
Labour welfare cost
Rent & rates
Insurance
Depreciation
(H.P. rating of Machines x hours x LF *
Consumption rate x hour
Machine hours or Man hours
Crane hours or weight of materials handled
Number of employees
Number of employees
Floor or Space area
Value of fixed asset
Value of fixed asset
* LF = Motor Load Factor
5.3 Secondary Distribution of Overheads :
Secondary distribution of overheads may be done by following either Reciprocal
basis or Non-Reciprocal Basis. While reciprocal basis considers the exchange of
service among the service departments, non-reciprocal basis considers only one
directional service flow from a service cost centre to other production cost centre(s).
5.4 Secondary Apportionment of Overheads on Reciprocal Basis
The services rendered by certain service cost centres are also utilized by other service
cost centres. In reciprocal secondary distribution, the cost of service cost centres are apportioned to production cost centres as well as other service cost centres. In such
case, any one of the following three methods may be followed :
I. Repeated Distribution Method
II. Trial & Error Method
III. Simultaneous Equation Method
5.4.1 Repeated Distribution Method
Steps to be followed under this method are :
i) The proportion at which the costs of a service cost centres are to be distributed to
production cost centres and other service cost centres are determined.
ii) Costs of first service cost centres are to be apportioned to production cost centres
and service cost centres in the proportion as determined in step (i).
iii) Similarly, the cost of other service cost centres are to be apportioned.
iv) This process as stated in (ii) and (iii) are to be continued till the figures remaining
undistributed in the service cost centres are negligibly small. The negligible small
amount left with service centre may be distributed to production cost centres.
For example, refer to Exhibit 1
5.4.2 Trial and Error Method
This method is to be followed when the question of distribution of costs of service cost
centres which are interlocked among themselves arises. In the first stage, gross costs of
services of service cost centres are determined and then in the second stage, costs of service
centres are apportioned to production cost centres. Steps to be followed :
i) The proportion at which the costs of a service cost centre to be distributed to
production cost centres and other service cost centres is determined.
ii) Cost of first service cost centre is distributed to the other service centres in the
proportion of service they received from the first as assessed in step (i).
iii) In the next step, total cost of second service cost centre so arrived has to be
distributed to the other service centres in the proportion of service they received
from the second as assessed in step (i).
iv) Similarly, the cost of other service cost centres are to be apportioned to the service
cost centres.
v) This process as described in (iii) and (iv) is to be continued till the figures
remaining undistributed in the service cost centres are negligibly small.
vi) At the last, total cost of service cost centres to be distributed to production cost
centres.
For example, refer to Exhibit 2
5.4.3 Simultaneous Equation Method
The simultaneous equation method is to be adopted to take care of secondary distribution
of cost of service cost centres to production cost centres with the help of mathematical
formulation and solution. Steps to be followed :
i) Proportion of service benefits received by different cost centres from a cost centre
are assessed on the basis of records ii) The same ratios are used as coefficients in the equations framed for apportionment
of cost of service cost centres to production cost centres.
iii) Solution of the equations gives the cost of service cost centres.
iv) Cost of service cost centres to be distributed to production cost centres
For example, refer to Exhibit 3
5.5 Secondary Apportionment of Overheads on Non-Reciprocal basis
In non-reciprocal secondary distribution, the costs of service cost centres are
apportioned to the production cost centres. Steps involved are :
i) The cost of first service cost centre is apportioned on a suitable basis to
production cost centres.
ii) The next step is to apportion the cost of second service centre to the
production cost centres as indicated in stage (i).
iii) The process is to be continued till the costs of all service cost centres are
apportioned.
For example, refer to Exhibit 4
5.6 Common bases for absorption of Production overheads from production cost centres
to products or services :
Bases of denominator Applicability
Unit of Production When single product is produced or various products are
similar in specification.
Direct labour cost When conversion process is labour intensive
and wage rates are substantially uniform
Direct labour hour When conversion process is labour intensive
Machine Hour or
Vessel Occupancy or
Reaction Hour or
Crushing Hour etc
When production mainly depends on performance of the
base
5.7 Absorption of Production Overheads and production capacity
Overheads shall be analysed into variable overheads and fixed overheads.
The variable production overheads shall be absorbed to products or services based on
actual capacity utilisation.
The fixed production overheads and other similar item of fixed costs such as quality
control cost shall be absorbed in the production cost on the basis of the normal
capacity or actual capacity utilization of the plant, whichever is higher.
In case of less production than normal, under-absorption of overheads shall be
adjusted with Costing Profit & Loss Account. In case of higher production than
normal, the over-absorption of overheads shall also be adjusted with Costing Profit &
Loss Account. 5.8 Absorption of Production overheads :
Production Overheads absorption rate for each cost centre is to be determined with the
help of quantum base as indicated in 5.6 above and the formula as indicated below :
Fixed overheads
Fixed overheads absorption rate = _____________________________
Normal or actual quantum of base,
whichever is higher
Variable overheads
Variable overheads absorption rate = ______________________
Actual quantum of base
5.9 A pre-determined rate may be used on a provisional basis for internal management
decision making such as cost estimates for quotation, fixation of selling price etc.
These rates are to be calculated for each cost centre for a particular period. Budgeted
overheads for the respective cost centres for the period concerned are to be taken as
numerator and budgeted normal base for the period as denominatotr for determining
the rate.
Budgeted Overheads for the period
Pre-determined overhead Rate = _______________________________
Budgeted normal base for the period
The amount of total overheads absorbed by a product, service or activity will be the
sum total of the overheads absorbed from individual cost centres on pre-determined
basis. The difference between overheads absorbed on pre-determined basis and the
actual overheads incurred is the under- or over-absorption of overheads.
The under- or over- absorption of overheads is mainly due to variation between the
estimation and actual.
6. Apportionment and absorption of Administrative Overheads
6.1 Administrative overheads include the following items of cost :
Printing and stationery, other office supplies
Employees cost – salaries of administrative staff
Establishment expenses – Office rent & rates, insurance, depreciation of office
building and other assets, legal expenses, audit fees, bank charges etc.
6.2 Administrative overheads are to be collected in different cost pools such as :
- General Office
- Personnel department
- Accounts department - Legal department
- Secretarial department etc
6.3 Administrative overheads are to be further analysed into two – one for production
activities and other for sales and distribution activities. Costs collected under the cost
pools indicated in 6.2 above are to be distributed to administrative overheads relating to
production activities and administrative overheads relating to selling and distribution
activities on rational basis for each cost pool.
6.4 Administrative overheads relating to production activities are to be apportioned to
different production cost centres on the basis conversion costs of production cost
centres. The apportioned overheads are absorbed to products on the basis of the normal
capacity or actual capacity, whichever is higher.
In case of under-absorption or over-absorption of administrative overheads relating to
production, the same shall also be adjusted with Costing Profit & Loss Account.
7. Apportionment and absorption of Selling overheads and Distribution overheads
7.1 The selling overheads and distribution overheads are collected under different cost
pools such as :
Selling Overheads :
(i) Sales Employees cost
(ii) Rent
(iii) Traveling expenses
(iv) Warranty claim
(v) Brokerage & Commission
(vi) Advertisement relating to sales and sales promotion
(vii) Sales incentive
(viii) Bad debt etc
Distribution Overheads :
(i) Secondary Packaging
(ii) Freight & forwarding
(iii) Warehousing & storage
(iv) Insurance etc.
7.2 Some items of selling overheads and distribution overheads are directly identified and
absorbed to products or services and remaining part of selling and distribution
overhead along with the with share of administration overheads relating to selling and
distribution activities are to be apportioned to various products or jobs or services on the
basis of net actual sales value (i.e. Gross sales value less excise duty, sales tax and other
government levies). 8. Presentation and Disclosure:
8.1 Once the basis of collection, allocation , apportionment and absorption for different
production cost centres are selected, the same shall be followed consistently and
uniformly
8.2 Change in basis for collection, allocation, apportionment and absorption can be
adopted only when it is compelled by the change in circumstances like change in
technology, refinement and improvement in the basis etc and the change would provide
more scientific approach. In case of such changes, proper disclosure in cost records is
essential..
8.3 Any change in basis for collection, allocation, apportionment and absorption which
has a material effect on the cost of the product should be disclosed in the cost
statements. Where the effect of such change is not ascertainable wholly or partly, the
fact should be indicated in the cost statement.
Exhibit 1
Reciprocal Overheads Apportionment : Repeated Method
Production Department Service Department
Machine Assembly Finishing Stores Repair
Ratio of apportionment from Stores 50% 20% 15% 15%
Ratio apportionment from Repair 40% 35% 15% 10%
Distribution from
Primary Distribution 35500.00 31900.00 14800.00 5000.00 6000.00
Stores Dept. 2500.00 1000.00 750.00 -5000.00 750.00
Total 38000.00 32900.00 15550.00 0.00 6750.00
Repairs & Maintenance Dept 2700.00 2362.50 1012.50 675.00 -6750.00
Total 40700.00 35262.50 16562.50 675.00 0.00
Stores Dept. 337.50 135.00 101.25 -675.00 101.25
Total 41037.50 35397.50 16663.75 0.00 101.25
Repairs & Maintenance Dept 40.50 35.44 15.19 10.13 -101.25
Total 41078.00 35432.94 16678.94 10.13 0.00
Stores Dept. 5.06 2.03 1.52 -10.13 1.52
Total 41083.06 35434.96 16680.46 0.00 1.52
Repairs & Maintenance Dept 0.61 0.53 0.23 0.15 -1.52
Total 41083.67 35435.49 16680.68 0.15 0.00
Stores Dept. 0.10 0.03 0.02 -0.15 0.00
Total 41083.77 35435.52 16680.71 0.00 0.00
Exhibit 2
Reciprocal Overhead Apportionment : Trial & Error Method
Production Department Service Department
Machine Assembly Finishing Stores Repair
Ratio of apportionment from Stores 50% 20% 15% 15%
Ratio of apportionment from Repair 40% 35% 15% 10%
Distribution from
Primary Distribution 35500.00 31900.00 14800.00 5000.00 6000.00
Distribution between service centres
Stores Dept. 0.00 750.00
Total 5000.00 6750.00
Repairs & Maintenance To stores 675.00 0
Stores Dept. to Repair & Maint 0.00 101.25
Repairs & Maintenance To stores 10.13 0.00
Stores Dept. to Repair & Maint 0.00 1.52
Repairs & Maintenance To stores 0.15 0.00
Stores Dept. to Repair & Maint 0.00 0.02
Gross cost of service cost centres 5685.28 6852.79
Stores to Production cost centres 2842.63 1137.06 852.79 -5685.28
Repairs & Maint to Production centres 2741.14 2398.46 1027.92 -6852.79
Total 41083.77 35435.52 16680.71 0 0
Exhibit 3
Reciprocal Overhead Apportionment : Simultaneous Equation Method
Production Departments Service Departments
Machine Assembly Finishing Stores Repair
Ratio of apportionment from Stores 50% 20% 15% 15%
Ratio of apportionment from Repair 40% 35% 15% 10%
Distribution from
Primary Distribution 35500.00 31900.00 14800.00 5000.00 6000.00
Let x, y be Store Dept and Repair & Maintenance Dept expenses respectively.
x - 0.10y = 5000
- 0.15x + y = 6000
Solving x = 5685.28 , y = 6852.79
Now, distribution of expenses will be as follows :
Production Departments Service Departments
Machine Assembly Finishing Stores Repair
Ratio of apportionment from Stores 50% 20% 15% 15%Ratio of apportionment from Repair 40% 35% 15% 10%
Amounts from Primary Distribution 35500.00 31900.00 14800.00 5685.28 6852.79
Stores to Production cost centres 2842.63 1137.06 852.79 -5685.28
Repairs & Maint to Production centres 2741.14 2398.46 1027.92 -6852.79
Total 41083.77 35435.52 16680.71 0 0
Exhibit 4
Non-Reciprocal Overheads Apportionment
Primary Distribution
Production Departments Service
Departments
Expenses Basis of
allocation /
apportionment
Total
(Rs.)
Machine
Shop
Assemb
ly Shop
Finishing
Dept
Stores Repairs
&
Maint.
Consumable stores
Supervision
Rent & Rates
Insurance
Depreciation
Power
Light & Heat
Direct Materials
Direct Wages
Area
Asset Value
Asset Value
H.PxHoursx LF
Area
15,400
22,800
10,000
2,000
30,000
9,000
4,000
5,200
7,900
3,000
800
12,000
5,400
1,200
6,000
5,100
2,000
900
13,500
3,600
800
2,000
6,100
2,500
200
3,000
-
1,000
600
2,200
1,000
50
750
-
400
1,600
1,500
1,500
50
750
-
600
Total 93,200 35,500 31,900 14,800 5,000 6,000
Secondary Distribution
Production Departments Service Departments
Expenses Basis of
allocation /
apportionment
Total
(Rs.)
Machine
Shop
Assembly
Shop
Finishing
Dept
Stores Repairs &
Maint.
Primary dist.
( earlier Table)
Stores
Repairs & Maint
Direct Material
( 9 : 6 :5)
Direct
( 2: 3: 1)
93,200 35,500
2,250
2,000
31,900
1,500
3,000
14,800
1,250
1,000
5,000
- 5,000
6,000
- 6,000
93,200 39, 750 36.400 17,050 0 0
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