Cost Accounting Standard 1
1
PREFACE TO COST ACCOUNTING STANDARD BOARD
1. Introduction
Due to open competition for globalization, the Cost Management has
gained special importance in the business activities. Cost Accounting
Standard Board ( hereinafter called CASB) set up by the Council of the
Institute of Cost and Works Accountants of India ( ICWAI ) and
following statements are issued to define the objectives, operating
procedures, scope and applicability and authority of CASB.
2. Constitution
2.1The CASB will have a Chairman as appointed and nominated by the
Council of the Institute and other members will also be appointed and
nominated by the Council.
2.2The terms and period of appointment will also be decided by the council
of the Institute.
2.3The Director( Technical ) will be the Secretary of the CASB.
2.4The CASB will prepare a report of its work each year and send it to the
Council.
3. Objective
The work of CASB is to develop Cost Accounting Standard on important
issues/topics relating to Cost and Management Accounting with the
following objectives :
3.1To equip the profession with better guidelines on standard cost
accounting practices 2
3.2To assist the Cost Accountants in preparation of uniform cost statements
3.3To provide guidelines to Cost Accountants to make standard approach
towards maintenance of Cost Accounting Record Rules and Undertaking
Cost Audit under section 209 (1) (d) and section 233B of Companies
Law respective and various other Acts like Income Tax Act, Central
Excise Act, Customs Act, Sales Tax Act, etc.
3.4 To assist the management to follow the standard cost accounting
practices in the matter of compliance of statutory obligations.
3.5To help Indian industry and the Government towards better cost
management
4. Operating Procedure and policies of CASB
4.1Organizing and initiating discussion and deliberation at national level to
identify the areas/topics in respect of which needs for standards are felt
4.2Generating information on all alternative cost accounting practices in
respect of selected practices
4.3Preparation of draft on the standard cost accounting practices in respect
of chosen areas/topic in cost accounting and circulate it to the members
of the Institute, national accounting institute and other end user bodies
like industry association, Chambers of Commerce and Industry,
Government bodies etc
4.4Allowing sufficient time for consideration and comments on the exposure
draft
4.5Pronouncement of the exposure draft as ‘standard’ after giving due
consideration to the suggestions and modification generated on the
circulated exposure drafts from such individuals and agencies as
mentioned in 4..3 above.
4.6To fix a date for the standard to be effective 3
4.7To propagate and generate acceptance and commitment to follow the
‘standards’ prescribed by CASB
4.8To revise the ‘standards’ once issued, if dictated by environment,
government, legal authority and other situation.
5. Scope and Applicability
5.1The ‘standards’ issued by CASB will be recommendatory in nature and
every member of the institute is expected to honour the same.
5.2A standards will always make sure that it complies with the legal
regulations in respect of the matter covered by it. However, a standard by
its vary nature will have to be more definite and specific than its legal
requirements.
5.3Any limitation in application of a ‘standard’ in specific circumstances
must be spelt out in the ‘standard’ itself.
5.4Every standard will broadly have two parts – (a) explanatory part and (b)
the operative part. The explanatory section will set out topic covered, the
premises, the need for standardization and methodology and rationale for
practice recommended. The second part, the operative portion will be the
definite direction on the matter.
5.5 Every standard will indicate the date from which it will be operative.
5.6 The standards will be applicable to preparation of cost statements and
other documents where the concepts embedded in the standard will be
applicable.
5.7 As far as maintenance of cost accounting record rules under section 209
(1) (d) is concerned, relevant matter covered under the standards ,
wherever applicable, will be followed. 4
5.8 Cost Auditors will adopt and encourage the adoption of the standards,
wherever applicable, in maintenance of Cost Accounting Record Rules
under section 209(1)(d) and report the deviations, if any, in the Cost
Audit Reports under section 233B.
5.9The Institute will take up the standards with National Accounting
Standard Board to enforce them and to include in Companies Act, 1956.
6. Authority attaching to the standard
6.1So long the standards are not enforced by National Accounting Standard
Board or by Companies Act, the CASB does not possess the legal
authority to impose its views as statutory regulations but it is by only
persuasion the standard can be followed as normal practice by the
members of the profession
6.2ICWAI will be duty bound to protect its members who respect and
adhere to the standard prescribed.
6.3Disciplinary restriction may be imposed by the Council of the Institute at
appropriate stages as may be felt necessary for not complying with or not
honouring the standard. 5
COST ACCOUNTING STANDARD ON
“CLASSIFICATION OF COST”
The following is the text of the COST ACCOUNTING STANDARD 1 (CAS
1) issued by the Council of the Institute of Cost and Works Accountants of
India on “Classification of Cost”. The standard deals with the principle of
classifying costs in the cost statements. 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 standard on classification of costs deals with the basis of classification of
costs and the practice to be adopted for classification of cost elements in
regard to its nature and management objective. The statement aims at providing
better understanding on classification of cost for preparation of various cost
statements required for statutory obligations or cost control measures.
2. Objective
2.1 The objective of this Standard is to prescribe the classification of costs
for ascertainment of cost of a product or service and preparation of cost
statements on a consistent and uniform basis with a view to effect the
comparability of the same of an enterprise with that of previous periods and of
other enterprises. 6
2.2 The classification and its disclosure are aimed at providing better
transparency in the cost statement.
2.3 The standard is also for better adoption of Uniform Costing and
Inter-firm Comparison.
3. Scope
3.1 The standard on classification of cost should be applied in assessment of
cost of a product or service, application of costing technique and in case of
management decision making by the manufacturing industries in India.
3.2 The standard is to be followed by an enterprise, whether covered under
section 209(1)(d) of the Companies Act,1956 or not, to classify cost in order to
prepare cost statement on uniform basis to make it relevant and understandable
for effective cost management.
3.3 The standard has also to be followed for the purpose of assessment of
cost of production or valuation of product or the valuation of stock to be
certified for calculation of duties and taxes, tariffs and other purposes as the
case may be. The cost statement prepared based on standard will be used for
assessment of excise duty and other taxes, anti-dumping measures, transfer
pricing etc.
4. Definitions:
4.1 Cost : Cost is a measurement, in monetary terms, of the amount of
resources used for the purpose of production of goods or rendering services. 7
4.2 Manufacturing of goods or rendering services involves consumption of
resources. Cost is measured by the sacrifice made in terms of resources or
price paid to acquire goods and services. The type of cost is often referred in
the costing system depends on the purpose for which cost is incurred. For
example material cost is the price of materials acquired for manufacturing a
product.
4.3 Cost Centre : Any unit of Cost Accounting selected with a view to
accumulating all cost under that unit. The unit may be a product, a service,
division, department, section, a group of plant and machinery , a group of
employees or a combination of several units. This may also be a budget
centre.
4.4 Cost Centre or Cost Object is the logical sub-unit for collection of cost.
Cost Centre may be of two types – personal and impersonal cost centers.
Personal cost centre consists of a person or a group of persons. Cost centres
which are not personal cost centres are impersonal cost centers. Again Cost
centers may be divided into broad types i.e. Production Cost Centres and
Service Cost Centres. Production Cost Centres are those which are engaged in
production like Machine shop, Welding shop, Assembly shop etc. Service Cost
centers are for rendering service to production cost centre like Power house,
Maintenance, Stores, Purchase office etc.
4.5 Cost unit is a form of measurement of volume of production or service.
This unit is generally adopted on the basis of convenience and practice in the
industry concerned.
4.6 Examples of Cost Units :
Power - MW
Cement - MT
Automobile - Number etc 8
5. Basic Rules for Classification of Costs
5.1 Classification of cost is the arrangement of items of costs in logical
groups having regard to their nature (subjective classification) or purpose
(objective classification).
5.2 Items should be classified by one characteristic for a specific purpose
without ambiguity.
5.3 Scheme of classification should be such that every item of cost can be
classified.
5.4 Basis of classification :
i) Nature of expense
ii) Relation to object – traceability
iii)Functions / activities
iv) Behaviour fixed, semi-variable or variable
v) Management decision making
vi) Production Process
vii) Time period
5.5 Classification of cost is the process of grouping the components of cost
under a common designation on the basis of similarities of nature, attributes or
relations. It is the process of identification of each item and the systematic
placement of like items together according to their common features. Items
grouped together under common heads may be further classified according to
their fundamental differences. The same costs may appear in several different
classifications depending on the purpose of classification. 9
5.6 Cost is classified normally in terms of a managerial objective. Its
presentation normally requires sub-classification. Such sub-classification may
be according to nature of the cost elements, functional lines, areas of
responsibility, or some other useful break-up. The appropriate sub-classification
depends upon the uses to be made of the cost report.
6. Classification of Costs
6.1 By Nature of expense:
6.1.1 Costs should be gathered together in their natural groupings such as
material, labour and other expenses. Items of costs differ on the basis of their
nature. The elements of cost can be classified in the following three
categories : i) Material ii) Labour iii) Expenses
Cost
Classification by nature
______________________________________________________
Material Labour Expenses
6.1.2 Material Cost is the cost of material of any nature used for the
purpose of production of a product or a service.
6.1.3 Material cost includes cost of procurement, freight inwards, taxes &
duties, insurance etc directly attributable to the acquisition. Trade discounts,
rebates, duty drawbacks, refunds on account of modvat, cenvat, salex tax and
other similar items are deducted in determining the costs of material. 10
6.1.4. Labour Cost means the payment made to the employees, permanent or
temporary, for their services.
6.1.5 Labour cost include salaries and wages paid to permanent employees,
temporary employees and also to employees of the contractor. Here, salaries &
wages include all fringe benefits like Provident Fund contribution, gratuity,
ESI, overtime, incentives, bonus , ex-gratia, leave encashment, wages for
holidays and idle time etc.
6.1.6 Expenses are other than material cost or labour cost which are
involved in an activity.
6.1.7 Expenditure on account of utilities, payment for bought out services, job
processing charges etc. can be termed as expenses.
6.2 By Relation to Cost Centre
6.2.1 Classification should be on the basis of method of allocation of cost to a
cost unit. If an expenditure can be allocated to a cost centre or cost object in
an economically feasible way then it is called direct otherwise the cost
component will be termed as indirect. According to this criteria for
classification, material cost is divided into direct material cost and indirect
material cost, labour cost into direct labour cost and indirect labour cost and
expenses into direct expenses and indirect expenses. Indirect cost is also
known as overhead. 11
Cost
Classification by relation to Cost Centre
_____________________________
Direct Indirect
__________________ ____________________
Material labour expenses Material labour expenses
6.2.2 Direct cost has three components – direct material cost, direct labour
cost and direct expenses and indirect cost has three components- indirect
material, indirect labour cost and indirect expenses. Sum of all direct costs is
called prime cost .
6.2.3 Direct material Cost is the cost of material which can be directly
allocated to a cost centre or a cost object in a economically feasible way.
6.2.4 Raw materials consumed for production for a product or service which
are identifiable in the product or service form the direct material cost. Direct
Material cost includes cost of procurement, freight inwards, taxes & duties,
insurance etc directly attributable to the acquisition. Trade discounts, rebates,
duty drawbacks, refunds on account of modvat, cenvat, salex tax and other
similar items are deducted in determining the costs of direct material.
6.2.4 Direct Labour Cost is the cost of wages of those workers who are
readily identified or linked with a cost centre or cost object.
6.2.5 Here, the wages of the workers include the fringe benefits include all
fringe benefits like Provident Fund contribution, gratuity, ESI, overtime, 12
incentives, bonus , ex-gratia, leave encashment, wages for holidays and idle
time etc. for the purpose of calculation of direct labour cost.
6.2.6 Direct Expenses are the expenses other than direct material or direct
labour which can be identified or linked with the cost centre or cost object.
6.2.7 Examples of direct expenses are
• expenses for special moulds required in a particular cost centre
• hiring charges for tools and equipments for a cost centre
• royalties in connection to a product
• Job processing charges etc
6.2.8 Indirect Material is the cost of material which can not be directly
allocable to a particular cost centre or cost object.
6.2.9 Materials which are of small value and can not be identified in or
allocated to a product/service are classified as indirect materials. Examples :
• Consumable spares and parts
• Lubricants etc.
6.2.10 Indirect labour cost is the wages of the employees which are not
directly allocable to a particular cost centre.
6.2.11 Examples of indirect labour :
• Salaries of staff in the administration and accounts department
• Salaries of security staff etc
6.2.12 Indirect expenses are the expenses other than of the nature of
material or labour and can not be directly allocable to a particular cost
centres. 13
6.2.13 Indirect expenses are not be allocable to a particular cost centre.
Examples – insurance, taxes and duties,
6.3 By functions/activities:
6.3.1 Costs should be classified according to the major functions for which
the elements are used into the following four major functions :
Production;
Administration;
Selling;
Distribution; and
Research & Development Expenditure.
Cost
Classification by function
_______________________________________________________
Production Administration Selling Distribution Research &
Development
6.3.2 Production Cost is the cost of all items involved in the production of a
product or service. It includes all direct costs and all indirect costs related to
the production.( Exhibit 1)
6.3.3 Production overhead is the indirect costs involved in the production
process. 14
6.3.4 Production overhead is also termed as factory overhead or manufacturing
overhead. Examples of Production overhead :
Salaries for staff for production planning, technical supervision,
factory administration etc
normal idle time cost
expenses for stores management
security expenses in the factory
labour welfare expenses
dispensary and canteen expenses
depreciation of plant and machineries
repair and maintenance of factory building and plant &
machineries
insurance
quality control etc.
6.3.5 Administration costs are expenses incurred for general management of
an organization. These are in the nature of indirect costs and are also
termed as administrative overhead.
6.3.6 Examples of items to be included in Administrative overhead :
Salaries of administrative and accounts staff
general office expenses like rent, lighting, rates and taxes, telephone,
stationery, postage etc
bank charges
audit fees
legal expenses
depreciation & repair and maintenance of office building etc. 15
6.3.7 Selling costs are indirect costs related to selling of products or services
and include all indirect cost in sales management for the organization.
6.3.8 Selling Costs include all costs relating to regular sales and sales
promotion activities. Examples of expenses which are included in selling cost
are :
Salaries, commission and traveling expenses for sales personnel
advertisement cost
Legal expenses for debt realization
market research cost
royalty on sale
after sales service cost etc
6.3.9 Distribution Costs are the cost incurred in handling a product from the
time it is completed in the works until it reaches the ultimate consumer.
6.3.10 Distribution costs are the costs incurred for distribution of product to
customers. Examples of distribution costs :
• Transportation cost
• cost of warehousing salable products
• cost of delivering the products to customers. etc
Note
1. Primary packaging cost is included in production cost whereas secondary
packaging cost is distribution cost.
2. In exceptional cases, for example in case of heavy industries equipment
supply, installation cost at delivery site for heavy equipments which involves
assembling of parts, testing etc is included in production cost but not
distribution cost. For example. installation cost of a gas turbine at plant site is
included in the cost of production of gas turbine.16
6.3.11 Research & Development Costs are the cost for undertaking
research to improve quality of a present product or improve process of
manufacture, develop a new product, market research etc and
commercialization thereof.
6.3.12 Research Cost comprises the cost of development of new product and
manufacturing process; improvement of existing products, process and
equipment; finding new uses for known products; solving technical problem
arising in manufacture and application of products etc. Development cost
includes the cost incurred for commercialization / implementation of research
findings.
Exhibit 1
(1) Direct Material Cost (a)
(2) Direct Labour Cost
(3) Direct Expenses
(1)+(2)+(3) = (4) Prime Cost
(5) Production Overhead
(6) Administrative Overhead
(7) Research & Development Cost ( apportioned )
(4)+(5)+(6)+(7)= (8) Cost of Production (b)
(9) Selling Cost
(10) Distribution Cost
(8)+(9)+(10) = (11) Cost of Sales
Note :
To arrive at value at different points as indicated above adjustment with opening and
closing stock is necessary at following different points :
(a) opening and closing stock of raw materials
(b) opening and closing stock of work-in-progress & finished goods 17
6.4 By Behaviour
6.4.1 Costs are classified based on behaviour as fixed cost, variable cost and
semi-variable cost depending upon response to the changes in the activity
levels.
Cost
Classification by behaviour
_____________________________________________________
Fixed Variable Semi-variable
6.4.2 Fixed Cost is the cost which does not vary with the change in the
volume of activity in the short run. These costs are not affected by
temporary fluctuation in activity of an enterprise. These are also known as
period costs.
6.4.3 Examples for fixed cost : salaries, rent, audit fees, depreciation etc.
6.4.4 Variable Cost is the cost of elements which tends to directly vary with
the volume of activity. Variable cost has two parts – (a) Variable direct cost;
and (b) Variable indirect costs. Variable indirect costs are termed as variable
overhead.
6.4.5 Examples of variable cost are materials consumed, direct labour, sales
commission, utilities, freight, packing, etc.
6.4.6 Semi Variable Costs contain both fixed and variable elements. They are
partly affected by fluctuation in the level of activity.
6.4.7 Examples of semi-variable cost : Factory supervision, maintenance,
power etc. 18
Note :
1. The characteristics of fixed costs are (1) fixed amount within an output
range (2) fixed cost per unit decreases with increased output
2. The characteristics of variable Cost: (1) The variable cost varies directly
with volume of activities or production (2) variable cost remains constant
per unit within a range of activity .
6.5 For Management Decision Making
6.5.1 Costs are classified for the purpose of management decision making
under different circumstances as under :
Cost
Management Decision Making
________________________________________________________________________
Marginal Differential Opportunity
Cost Cost Cost
Replacement
Cost
Relevant Sunk
Cost Imputed Cost
cost
Normal
Cost
Abnormal
Cost
Avoidable
Cost
Un-avoidable
Cost
6.5.2 Marginal cost is the aggregate of variable costs, i.e. prime cost plus
variable overhead. Marginal cost per unit is the change in the amount at any 19
given volume of output by which the aggregate cost changes if the volume of
output is increased or decreased by one unit.
6.5.3 Marginal cost is used in Marginal Costing system. For determining
marginal cost, semi-variable costs, if any, are segregated into fixed and variable
cost. Then, variable costs plus the variable part of semi-variable costs is the
total marginal cost for the volume of production in consideration.
Example :
A. Production 45,000 units
Fixed Cost Variable Cost
B. Cost Rs lakhs Rs lakhs
1. Material cost 4.50
2. Labour cost 2.45
3. Fixed Cost 4.80 -
4. Variable Production & Selling overhead 2.30
5. Semi-variable Cost 3.20 2.00
( after segregation fixed and variable part)
----------------
C. Total Marginal Cost 11.25
--------------
D. Marginal cost per unit Rs 25.00
6.5.4. Differential Cost is the change in cost due to change in activity from
one level to another. 20
6.5.5 Differential Cost is found by using the principle which highlights the
points of differences in costs by adoption of different alternatives. This
technique is used in export pricing, new products and pricing goods sought to
be promoted in new markets, either within the country or outside.
6.5.6 The algebraic difference between the relevant cost at two levels of
activities is the differential cost. When the level of activity is increased, the
differential cost is known as incremental cost and when the level of activity is
decreased, the decrease in cost is known as decremental cost.
Output
Unit in
Lakhs
Differential
Unit in
lakhs
Total Cost
(Rs
lakhs)
Differential
cost
( Rs lakhs)
Differential
cost per
unit
( Rs)
(a) 1.00 - 30.00 - -
(b)1.20 0.20 ( b) –
(a)
35.00 5.00 25.00
© 0.80 0.20 ( a) –
(c)
26.00 - 4.00 - 20.00
( +) Incremental cost
( -) Decremental cost
6.5.7 Opportunity Cost is the value of the alternatives foregone by adopting a
particular strategy or employing resources in specific manner.
6.5.8 It is the return expected from an investment other than the present one.
The opportunity cost is considered for selection of a project or justification of 21
investment, studying viability of an investment option. Example : A machine is
currently being used to produce product P. It can also be used to produce
product Q which can fetch Rs 60,000 profit. Then the opportunity cost of using
the machine is Rs 60000.
6.5.9 Replacement Cost is the cost of an asset in the current market for the
purpose of replacement.
6.5.10 Replacement cost is generally used for determining the optimum time of
replacement of an equipment or machine in consideration of maintenance cost
of the existing one and its productive capacity.
6.5.11 Relevant Costs are costs relevant for a specific purpose or situation.
6.5.12 In the context of decision making relating to a specific issue, only those
costs which are relevant are considered. A particular cost item may be relevant
in a decision making and may be irrelevant in some other decision making
situation. For example, present depreciated cost of machine is relevant in case
of decision of its sale but it is irrelevant in case of decision of its replacement.
6.5.13 Imputed Costs are hypothetical or notional costs, not involving cash
outlay, computed only for the purpose of decision making.
6.5.14. 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 22
similar to opportunity costs. Interest on internally generated fund, which is not
actually paid is an example of imputed cost.
6.5.15 Sunk Costs are historical costs which are incurred i.e. ‘sunk’ in the
past and are not relevant to the particular decision making problem being
considered.
6.5.16 Sunk costs are those that have been incurred for a project and which will
not be recovered if the project is terminated. While considering the
replacement of a plant, the depreciated book value of the old asset is irrelevant
as the amount is a sunk cost which is to be written off at the time of
replacement.
6.5.17 Normal Cost is a cost that is normally incurred at a given level of
output in the conditions in which that level of output is achieved.
6.5.18 Normal cost includes those items of cost which occur in the normal
situation of production process or in the normal environment of the business.
The normal idle time is to be included in the ascertainment of normal cost.
6.5.19 Abnormal Cost is an unusual or a typical cost whose occurrence is
usually irregular and unexpected and due to some abnormal situation of the
production.
6.5.20 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 for
decision making and charged to profit & loss account. 23
6.5.21 Avoidable Costs are those costs which under given conditions of
performance efficiency should not have been incurred.
6.5.22. Avoidable costs are logically associated with some activity or situation
and are ascertained by the difference of actual cost with the happening of the
situation and the normal cost. When spoilage occurs in manufacture in excess of
normal limit, the resulting cost of spoilage is avoidable cost. Cost variances
which are controllable may be termed as avoidable cost.
6.5.23 Unavoidable Costs are inescapable costs which are essentially to be
incurred, within the limits or norms provided for. It is the cost that must be
incurred under a programme of business restriction. It is fixed in nature and
inescapable.
6.6. By nature of production process
6.6.1 Costs are also classified on the basis of nature of production or
manufacturing process.
Cost
Classification by Production Process
____________________________________________________________
Batch Process Operation Operating Contract Joint
Cost Cost Cost Cost Cost Cost
6.6.2 Batch Cost is the aggregate cost related to a cost unit which consist of a
group of similar articles which maintain its identity throughout one or more
stages of production. 24
6.6.3 Process cost : When the production process is such that goods are
produced from a sequence of continuous or repetitive operations or processes,
the cost incurred during a period is considered as process cost. The process
cost per unit is derived by dividing the process cost by number of units
produced in the process during the period.
6.6.4. Accounts are maintained for cost of a process for a period. The average
cost per unit produced during the period is process cost per unit.
6.6.5 Operation Cost is the cost a specific operation involved in a production
process or business activity.
6.6.6. When there are distinctly separate operations involved in a process, cost
for each operation is found out for effective control mechanism.
6.6.7 Operating Cost is the cost incurred in conducting a business activity.
Operating costs refer to the cost of undertakings which do not manufacture
any product but which provide services.
6.6.8 Contract cost is the cost of a contract with some terms and condition of
adjustment agreed upon between the contractee and the contractor.
6.6.9.Contract cost usually implied to major long term contracts as distinct from
short term job costs. Escalation clause are sometimes provided in the contract
in order to take care of anticipated change in material price, labour cost etc. 25
6.6.10 Joint Costs are the common cost of facilities or services employed in
the output of two or more simultaneously produced or otherwise closely
related operations, commodities or services.
6.6.11 When a production process is such that from a set of same input, two or
more distinguishably different products are produced together, products of
greater importance are termed as joint products and products of minor
importance are termed as by-products and the costs incurred prior to the point
of separation of the products are termed as Joint Costs. For example, in a
petroleum refinery industry, petrol, diesel oil, kerosene oil, naptha, tar etc are
produced jointly in the refinery process.
6.6.12 By-Product Cost is the cost assigned to the by-products.
6.7 Classification by time
6.7.1 A cost item is related to a specific period of time and cost can be
classified according to the system of assessment and specific purpose as
indicated in the following ways:
Cost
Classification by time
_____________________________________________________
Historical Pre-determined Standard Estimated
Cost Cost Cost Cost
6.7.2 Historical Costs are the actual costs of acquiring assets or producing
goods or services. 26
6.7.3 They are ‘postmortem’ costs ascertained after they have been incurred
and they represent the cost of actual operational performance. Historical
costing system follows a system of accounting to which all values ( in revenue
and capital accounts) are based on costs actually incurred or as relevant from
time to time.
6.7.4 Pre-determined Costs for a product are computed in advance of
production, on the basis of a specification of all the factors affecting cost and
cost data. Pre-determined costs may be either standard or estimated.
6.7.5 Standard Costs : A predetermined norm applied as a scale of reference
for assessing actual cost, whether these are more or less. The standard cost
serves as a basis of cost control and as a measure of productive efficiency
when ultimately posed with an actual cost. It provides management with a
medium by which the effectiveness of current results is measured and
responsibility of deviation placed.
6.7.6. 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.
6.7.7 Estimated Costs of a product are prepared in advance prior to the
performance of operations or even before the acceptance of sale orders.
6.7.8 Estimated cost is found with specific reference to product in question, and
activity level of the plant. It has no link with actual and hence it is assumed to
be less accurate than the standard cost. 27
7. Presentation and Disclosure:
7.1 The classification of cost item should be done on ‘ basis of classification’
chosen with pre-determined objective.
7.2 The classification of cost item should be followed consistently from
period to period and preparation of cost statements should be made with
reference to a period of time.
7.3 A change in classification should be made only if it is required by law or
for compliance with a Cost Accounting Standard or the change would reset in
a more appropriate preparation or presentation of cost statements of an
enterprise.
7.4. Any change in classification of cost 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.
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