CAS-6 (REVISED 2017)
COST ACCOUNTING STANDARD ON MATERIAL COST
The following is the COST ACCOUNTING STANDARD 6 (CAS 6) (Revised 2017) issued by the Council of The Institute of Cost Accountants of India on “MATERIAL COST”. In this Standard, the standard portions have been set in bold italic type. This standard should be read in the context of the background material, which has been set in normal type.
1.1 This standard deals with principles and methods of determining the Material Cost.
Material for the purpose of this standard includes raw materials, process materials, additives, manufactured / bought out components, sub-assemblies, accessories, semi-finished goods, consumable stores, spares and other indirect materials. This standard does not deal with Packing Materials as a separate standard is being issued on the subject.
1.2 This standard deals with the principles and methods of classification, measurement and assignment of material cost, for determination of the Cost of product or service, and the presentation and disclosure in cost statements.
1.3 The Standard deals with the following issues.
- Principle of Valuation of receipt of materials.
- Principle of Valuation of issue of materials.
- Assignment of material cost to cost objects.
The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the material cost with reasonable accuracy.
This standard should be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of material costs including those requiring attestation.
The following terms are being used in this standard with the meaning specified.
4.1 Abnormal cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/ or due to some abnormal situation of the production or operation1.
4.2 Administrative overheads: Cost of all activities relating to general management and administration of an entity.
4.3 Cost Object: An activity, contract, cost centre, customer, process, product, project, service or any other object for which costs are ascertained.
4.4 Defectives: Materials, products or intermediate products that do not meet quality standards. This may include reworks or rejects.
4.4.1 Reworks: Defectives which can be brought up to the standards by putting in additional resources.
Rework includes repairs, reconditioning and refurbishing.
4.4.2 Rejects: Defectives which cannot meet the quality standards even after putting in additional resources.
Rejects may be disposed off as waste or sold for salvage value or recycled in the production process.
4.5 Intermediate Product: An intermediate product is a product that requires further processing before it is saleable.
4.6.1 Direct Materials: Materials the costs of which can be attributed to a cost object in an economically feasible way2.
4.6.2 Indirect Materials: Materials, the costs of which cannot be directly attributed to a particular cost object3.
4.7 Material Cost: The cost of material used for the purpose of production of a product or rendering a service.
4.8 Production overheads: Indirect costs involved in the production of a product or in rendering service
The terms Production Overheads, Factory Overheads, Works Overheads and Manufacturing Overheads denote the same meaning and are used interchangeably.
4.9 Property, plant and equipment are tangible assets that:
(a) are held for use in the production of goods or supply of services, for rental to others, for administrative, selling or distribution purposes; and
(b) are expected to be used during more than one accounting period.
4.10 Scrap: Discarded material having no or insignificant value and which is usually either disposed off without further treatment (other than reclamation and handling) or reintroduced into the process in place of raw material.
4.11 Standard Cost: A predetermined cost of a product or service based on technical specifications and efficient operating conditions
The standard cost serves as a basis of cost control and as a measure of productive efficiency when ultimately posed with an actual cost. It provides management with a medium by which the effectiveness of current results is measured and responsibility for deviation is placed.4 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.
4.12 Waste and spoilage:
4.12.1 Waste: Material lost during production or storage and discarded material which may or may not have any value.
4.12.2 Spoilage: Production that does not meet the quality requirements or specifications and cannot be rectified economically.
5. Principles of Measurement
5.1. Principle of valuation of receipt of materials:
5.1.1 The material receipt 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 by the taxing authorities) that can be quantified with reasonable accuracy 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 credits and other similar items of credit recovered! recoverable.
5.1.2 Finance costs incurred in connection with the acquisition of materials shall not form part of material cost.
5.1.3 Self manufactured materials shall be valued including direct material cost, direct employee cost, direct expenses, factory overheads, share of administrative overheads relating to production but excluding share of other administrative overheads, finance cost and marketing overheads. In case of captive consumption, the valuation shall be in accordance with Cost Accounting Standard 4.
5.1.4 Items such as spare parts, stand-by equipment and servicing equipment are recognised as property, plant and equipment when they meet the definition of property, plant and equipment and depreciated accordingly. Otherwise, such items are classified as inventory and recognised in cost as and when these are consumed.
5.1.5 Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall be absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from disposal.
5.1.6 Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc., before the material is received shall be absorbed in material cost to the extent they are normal, with corresponding adjustment in the quantity.
The adjustment for moisture will depend on whether dry weight is used for measurement.
5.1.7 The forex component of imported material cost shall be converted at the rate on the date of the transaction. Any subsequent change in the exchange rate till payment or otherwise shall not form part of the material cost.
Explanation: The date on which a transaction (whether for goods or services) is recognised
in accounting in conformity with generally accepted accounting principles
5.1.8 Any demurrage or detention charges, or penalty levied by transport or other authorities shall not form part of the cost of materials.
5.1.9 Subsidy/Grant/Incentive and any such payment received/receivable with respect to any material shall be reduced from cost for ascertainment of the cost of the cost object to which such amounts are related.
5.2. Principle of valuation of issue of material
5.2.1 Issues shall be valued using appropriate assumptions on cost flow. E.g. First In First Out, Last In First Out, Weighted Average Rate. The method of valuation shall be followed on a consistent basis.
5.2.2 Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material cost.
5.2.3 Any abnormal cost shall be excluded from the material cost.
5.2.4 Wherever, material costs include transportation costs, determination of costs of transportation shall be governed by CAS 5 – Cost Accounting Standard on Determination of Average (Equalized) Cost of Transportation.
5.3 Self manufactured components and sub-assemblies shall be valued including direct material cost, direct employee cost, direct expenses, factory overheads, share of administrative overheads relating to production but excluding share of other administrative overheads, finance cost and marketing overheads. In case of captive consumption, the valuation shall be in accordance with Cost Accounting Standard 4.
5.4 The material cost of normal scrap! defectives which are rejects shall be included in the material cost of goods manufactured. The material cost of actual scrap ! defectives, not exceeding the normal shall be adjusted in the material cost of good production. Material Cost of abnormal scrap !defectives should not be included in material cost but treated as loss after giving credit to the realisable value of such scrap ! defectives.
6. Assignment of costs
The basis of assignment of costs to the cost of product or service is dealt within this section.
6.1 Assignment of costs – Materials
6.1.1 Assignment of material costs to cost objects: Material costs shall be directly traced to a Cost object to the extent it is economically feasible and !or shall be assigned to the cost object on the basis of material quantity consumed or similar identifiable measure and valued as per the principles laid under Paragraph 5.
6.1.2 Where the material costs are not directly traceable to the cost object, these may be assigned on a suitable basis like technical estimates.
6.2 Assignment of costs – Direct Expenses
6.2.1 Where a material is processed or part manufactured by a third party according to specifications provided by the buyer, the processing! manufacturing charges payable to the third party shall be treated as part of the material cost.
6.2.2 Wherever part of the manufacturing operations ! activity is subcontracted, the subcontract charges related to materials shall be treated as direct expenses and assigned directly to the cost object.
6.3 Assignment of costs– Indirect materials
6.3.1 The cost of indirect materials shall be assigned to the various Cost objects based on a suitable basis such as actual usage or technical norms or a similar identifiable measure.
6.3.2 The cost of materials like catalysts, dies, tools, moulds, patterns etc, which are relatable to production over a period of time shall be amortized over the production units benefited by such cost.
6.3.3 The cost of indirect material with life exceeding one year shall be included in cost over the useful life of the material.
Cost Statements governed by this standard, shall present material costs as detailed below:
7.1 Direct Materials shall be classified in the cost statement under suitable heads. E.g.
- Raw materials,
- Semi finished goods and
7.2 Direct Materials shall be classified as Purchased – indigenous, imported and self manufactured.
7.3 Indirect Materials shall be classified in the cost statement under suitable heads.
Indirect materials may be grouped under major heads like tools, stores and spares, machinery spares, jigs and fixtures, consumable stores, etc., if they are significant.
The following information should be disclosed in the cost statements dealing with determination of material cost.
8.1 Quantity and rates of major items of materials shall be disclosed. Major items are defined as those who form 5% of cost of materials.
8.2 The basis of valuation of materials shall be disclosed.
8.3 Any change in the cost accounting principles and methods applied for the determination of the material cost during the period covered by the cost statement which has a material effect on the cost of the material shall be disclosed. Where the effect of such change is not ascertainable wholly or partly, the fact shall be indicated.
8.4 Any abnormal cost excluded from the material cost shall be disclosed.
8.5 Any demurrage or detention charges, penalty levied by transport or other authorities excluded from the material cost shall be disclosed.
8.6 Any Subsidy/Grant/Incentive or any such payment reduced from material cost shall be disclosed.
8.7 Cost of Materials procured from related parties5 shall be disclosed
8.8 Disclosures shall be made only where significant, material and quantifiable.
8.9 Disclosures may be made in the body of the Cost statement or as a footnote or as a separate schedule.