Construction Industry is a very important industry in India from contribution to GDP and from Employment generation point of view. Government wants to develop infrastructure and also wants to push the housing sector. Government is providing various incentives to push the sector. This article deals with Cost Records and Cost Audit Applicability Criteria, Special features of Cost Records, Benefits of Cost Records and Sample Cost Sheet for illustration purpose. Companies (Cost Records and Audit) Rules, 2014 and guidance notes issued by the Institute of Cost Accountants of India contain detailed provisions.
Applicability of Cost Records and Cost Audit Provisions
The Companies (Cost Records and Audit) Rules, 2014 contain Provisions for applicability of Cost Records and Cost Audit. Rule 3 of these rules, contain two tables. Table A for Regulated Sector and Table B for Non Regulated Sector. These tables contain Name of Industry/Sector/Product/Service and Custom Tariff Act Heading, (wherever applicable). If company falls in these tables and its Turnover exceeds specified limits, it has to maintain Cost Records and go for Cost Audit. From Construction Industry point of view, following are important.
Sr.No.10 in Table B: Roads and other infrastructure projects corresponding to para No. (1) (a) as specified in Schedule VI of the Companies Act, 2013
Sr.No.21 in Table B: Construction Industry as per para No. (5) (a) as specified in Schedule VI of the Companies Act, 2013.
Applicability Criteria: If Company is engaged in above activities and its Turnover exceeds Rs.35 Cr, it has to maintain Cost Records and if Turnover exceeds Rs.100 CR, it has to get Cost Audit done. Companies classified as a micro enterprise or a small enterprise including as per the Turnover criteria under section 7(9) of the Micro, Small and Medium Enterprises Development Act, 2006 are exempt from Cost Records Maintenance Rules.
Contents of above mentioned paras of Schedule VI of the Companies Act, 2013 are given below for understanding and easy reference.
The term “infrastructural projects “or “infrastructural facilities “includes the following projects or activities:-
(1) Transportation (including inter modal transportation), which includes the following:-
(a) Roads of all types, bridges, highways, road transport providers, and other road related Services;
(2) Industrial, Commercial and Social development and maintenance, including the
Following namely:-
(a) Real estate development, including an industrial park or special economic zone.
For understanding of Real State Project, we have to refer Section 2 (zn) of the Real State (Regulation and Development Act), 2016.
Special features of Cost Records
- Stage of Completion of activity in case of Construction Work is important.
- Cost Object wise maintenance of Cost Records.
- Cost Sheets of Own manufactures items like Ready Mix Concrete Structures or Fabricated Structures are to be prepared
- Cost of indirect materials like Scaffolding, Shuttering materials and one time payments whose benefit is going to accrue over duration of project to be amortized over their useful period
- Utilities in case of this industry are generally Power (Purchased as well as self generated), Compressed Air, Sewage & Effluent treatment plant and water etc. Cost Sheet of each utility to be prepared
- Royalty paid for Quarry mining rights for production of Boulders to be part of Material Cost
- There can be special costs such as expenses incurred towards rehabilitation after acquisition of land for construction, Clearance of encroachments etc.
- WIP to be measured as % completion of the project on the basis of work certification
- Each Project is like product. Cost sheet to be prepared separately
- Sales Records include records of running bill account, milestone payment schedule and in case of Real Estate companies records will include slab wise payment schedule or payments after getting occupation certificate. Separate sale records of Residential, Commercial or Industrial units sold to be maintained.
Benefits of Cost Records
- Monetary measurement of risks, Management of risks and Cost Benefit analysis of mitigation measures
- Measurement and Optimum allocation of resources
- Project monitoring
- Cost measurement and Variance analysis (Cost and Time Overruns)
- Identification of cost overruns at early stage
- Correct pricing of products and cost implications on each variation
- Data for Decision making and timely compliances
- Enhancing profitability by project monitoring and cost control on regular basis
- Upcoming Projects feasibility study
| Sample Cost Sheet for Construction of Houses | |||
| Name of Company | |||
| Cost Sheet for the Year | |||
| Name of Project | |||
| Location | |||
| Category of Units | |||
| No.of Units (Constructed, Sold and Unsold) | |||
| Sr.No. | Cost Elements | Total Amount | Cost Per Unit |
| 1 | Land Cost | ||
| 2 | Land Development Cost | ||
| 3 | Local Authorities Charges | ||
| 4 | Cost of Construction Materials | ||
| 5 | Cost of Utilities | ||
| 6 | Direct Employees/Workers Cost | ||
| 7 | Design Cost | ||
| 8 | Insurance Cost | ||
| 9 | Sub-Contractor Charges | ||
| 10 | Other Direct Costs | ||
| 11 | Depreciation/Amortization | ||
| 12 | Cost of Hiring/leasing plant & machinery | ||
| 13 | Construction/ Development Overheads | ||
| 14 | Industry Specific Expenses | ||
| 15 | Changes in Work-in-Progress | ||
| 16 | Changes in Finished Stock | ||
| 17 | Administrative Overheads | ||
| 18 | Marketing & Selling Overheads | ||
| 19 | Interest & Financing Charges | ||
| 20 | Cost of Sales | ||
| 21 | Total Revenue | ||
| 22 | Margin | ||
| Note: (1) | This Cost Sheet is Basic Cost Sheet with the assumption that all units | ||
| constructed are of same category and size. | |||
| Note: (2) | If Project involves construction of Residential Units and Commercial Units | ||
| Of different area, then columns will be added in this cost sheet. | |||
Conclusions
There are many differences between Manufacturing Industry and Construction Industry from Revenue Recognition and from Costing point of views. Management should prepare the cost records not only for statutory compliance but also prepare detailed cost records for MIS. Costing of each activity can throw light on areas which need attention and will help in improving profitability.
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