Covid-19 has imbalanced the whole world emotionally, socially as well as economically. Impact is so deep that it will take years together to fulfill the gap. Economically or socially we may get some relief but emotionally we will not.

Whole health system of developed or under developed countries collapsed and millions of people died in last one-year and it is still going on. India has also got impacted badly especially in 2nd wave of COVID-19 started in April, 2021 which is more dangerous then 1st one. India’s GDP dipped to (-) 23.9 in first quarter of FY 2020-21 and was (-)8 for the whole year. Except agriculture, all sectors of economy were in negative growth. Agriculture gave 3.4% growth during the FY 2020-21.

During the year 2020-21 due to jobs loss, non-availability of food and medical facilities and uncertainty about their future in urban India, millions of people travelled on foot for thousands of Kilo meters from cities to their native places in rural India as they were not left with any other option. Many died on their way to native places. Economist called it as reversed migration of labour or agriculture refugees went back to their homes. Due to sudden break down for more than two months, production got hampered and Industry suffer heavy losses on account of raw material shortage, idle labour, loss of WIP, minimum guarantee charges for electricity or similar charges, insurance premium, rent etc. etc. Industries like Hotel and Tourism, Entertainment, Automobile, Aviation hit hard and millions of people lost their jobs also. On the other side due to increase in fuel prices to new high, transportation cost disturbed the annual budgets of every economic activity.

In Industry, due to sudden breakdown costing of each product and service also got affected. On one side level of production reduced drastically and on other side Industry incurred expenses to keep the infrastructure operational. Also paid wages to keep the labour available for future activities. Expenses like rents, premiums, minimum guarantee charges, interest on working capital were paid without the use of such services. So in net shell it was huge loss to the industry.

In India, the Institute of Cost Accountants of India (ICAI-CMA), a regulator for Generally Accepted Cost Accounting Principles (GACAP) and practices has issued some Cost Accounting Standards (CAS) to be adopted by the industry to determine the cost of their products and services. These standards are also helpful in compliance to Companies (Cost Records and Audit Rules) 2014 issued under Section 148 of Companies Act, 2013. These standards laid down the procedure to determine the actual cost of any goods manufactured or services offered. Based on these standards industry decides its price of goods or services for market and pay taxes on manufacturing and services.

As per these standards there are three major factors i.e Variable Cost, Fixed Cost and Capacity utilization, which impact the cost of any goods manufactured or services rendered.

Variable Cost: It’s a cost which has direct link with production and increases with increase in production and reduces with less production. Per unit cost remains same. Following are the examples of variable cost elements:

– Raw Material Cost

– Utility Cost

– Direct Expenses

– Other Production overheads

These costs may have some fixed cost element.

Fixed Cost: It’s a cost which is fixed in nature irrespective if production level. Per unit cost reduces with increase in production and increases with reduction in production level. Following are the examples of fixed cost elements:

– Salary and wages

– Electricity

– Depreciation

– Rent

– Premium

– Minimum commitment charges

– Interest Cost

These cost may have some Variable Cost elements.

Further, as per the Cost Accounting Standards (CAS) all costs or expenses or overheads are not part of total cost of goods or services. So, expenses or cost which are not part of total cost of products or services are known as non-cost items or non-costs.  It means non-cost items or non-costs are not included in cost of goods manufactured or services offered. Following are some of non-cost items:

– Donations

– CSR expenses

– Goods lost in transit

– Loss due to fire or major break down or sudden breakdown

– Abnormal losses in operations

– Penalties, Fines

– Idle time wages

– Foreign exchange fluctuation

– Idle capacity or underutilized capacity expenses

– Expenses incurred during political or civil disturbances

It is always advisable that at the time of fixing prices for goods or services, one must understand non-cost items in operations and only than final prices should be declared for better results in market.

Another factor which impact Cost of any product or services is Capacity utilization of any plant or machinery or manufacturing units. CAS-02 issued by ICAI-CMA define the process to determine the capacity available for manufacturing of any products or render service, capacity utilized and idle capacity or un-utilized capacity or under-utilized capacity.  Capacity utilization is work out on the principle of normal circumstances. In normal conditions or circumstances we achieve maximum level of output. Anything which is not normal is abnormal and it has adverse impact on our results.

We all know that when we install any manufacturing facilities, we work out the maximum capacity for that facility and accordingly cost of the project is worked out. When commercial production starts, we work out the capacity available for production and finally based on actual production we reach out the actual capacity utilized. Idle capacity, if any, has adverse impact on business performance i.e high cost, less margins etc.

COVID-19 is not normal situation or circumstances. It is abnormal situation and it has adverse impact on business. Because of COVID-19 situation, Variable cost, Fixed Cost and Capacity utilization got affected. So while working out the cost of product or services rendered for the FY 2020-21, we need to redefine our capacity available and capacity utilized. Similarly, due to COVID-19 period there was no production, but industry has paid wages along with other welfare expenses, electricity bills, rents, advertisement expenses, lost WIP, damage to its supply chain and many more. Industry has incurred both variable as well as fixed costs to keep the manufacturing facilities live. Similarly, because of no production, there was idle capacity and production loss reduced the profits.

 Let us understand how COVID-19 impacted costing and margin through this hypothetical example:

 ABC Ltd a manufacturing unit of steel has an installed capacity to process 1,00,000 MT of steel every year. Quantitative information that we revealed from its Cost records are as under:

Installed capacity 100,000 MT
Available Capacity 95,000 MT
Working days 360 days a year
Scheduled Break downs 30 days a year
Actual working days 330 days a year
Average Actual Production for last three yrs 70,000 MT  (Normal Capacity)
Average Utilized capacity 73.68 % of available capacity
Lock down days 2020-21 60 days
Actual working days 2020-21 270 days
Actual Production     2020-21 55000 MT
Utilized capacity        2020-21 57.89 % available capacity

Cost related information for the FY 2020-21 are as under:

Raw material Consumption Cost  29,20,000/-
Electricity and Fuel    3,00,000/-
Wages     5,00,000/-
Stores and Spares     2,00,000/-
Quality Assurance     1,50,450/-
Depreciation     3,75,000/-
Other Production OH     2,75,000/-
Administration Cost     1,95,000/-
Marketing Cost     2,25,000/-
Selling and Distributions Costs     1,85,000/-
Finance Cost     1,89,500/-

On scrutiny of the above Cost records/details it is found that Company was not having any production for 60 days lock down period but has incurred following expenses during the said period:

Wages Rs. 50,000/-
Electricity Exp : Rs. 35,000/-  minimum guarantee usage
Rents Rs. 20,000/-  (included in Admn Expenses)
Depreciation Rs. 45,000/-  (two months of lock down)
Other Production O/H : Rs. 56,000/-
Interest Rs. 15,000/-
Insurance Premium Rs. 10,000/-  (Included in Marketing Exp)
Total Expenses   Rs. 2,31,000/-

So, as per CAS, these expenses are Fixed expenses in nature which have been incurred by the business but there was no production. These expenses cannot be allocated or charged to actual production done during 2020-21. Accordingly, these expense should be treated as non-cost items and are not part of cost records or cost sheet for the products manufactured. These are abnormal in nature.

On further discussions and scrutiny of records reveal that following expenses are also incurred and included in Administrative Exp to take protection during COVID-19:

Sanitization of factory n offices Rs. 23560/-
PPE Kits Rs. 15640/-
Gloves and medicines Rs. 15340/-


Total Rs.  54,540/-

These expenses are not of regular or non-recurring in nature and have been incurred during abnormal circumstances. So as per CAS, these are also non-cost in nature and should not be charged to Cost Sheet of the products manufactured.

There are no WIP (Opening or Closing) and Finished Goods (Opening and Closing)

On the other hand, ABC Ltd need to redefine its Normal and Utilized capacity for FY 2020-21. As per the information available:

– Actual working days for 2020-21 = 270 days

– Actual production = 55,000 MT.

– Revised Available Capacity = 77,727 MT (95000/330*270)

– Revised Normal Capacity = 57517 MT (73.68% of 77727)

– Capacity utilization for FY 2020-21 = 70.76% (55000/77727*100).

The revised utilized capacity is more or less close to standard utilized capacity of the unit.

Comparative Cost sheet of normal time and COVID period:

 For above example we have drawn cost sheets for 55000 MT production for normal year and for COVID affected year.  

Sr No Particulars Cost Sheet (if Normal year) Cost Sheet (COVID year)
    Amt Cost PU Amt Cost PU
  Normal/ Revised Normal Capacity 70000   57518  
A Average/ Actual  Production MT 70000   55000  
  Raw material 3716300 53.09 2920000 53.09
  Wages 500000 7.14 450000 8.18**
  Electricity and Fuel 300000 4.29 265000 4.81**
  Stores and Spare 200000 2.86 200000 3.64
  Quality Assurance 150450 2.15 150450 2.73
  Depreciation 375000 5.35 330000 6.00**
  Other Prod O/H 275000 3.93 219000 3.98**
B Production Cost 4720450 67.43 4534450 82.44
  Administration Cost 195000 2.79 120460* 2.19**
  Marketing Cost 225000 3.21 215000 3.91**
  Selling and Distribution 185000 3.36 185000 3.36
  Interest Cost 189500 2.70 174500 3.17**
C Cost of Sale 5514950 78.78 5229410 95.08
D Sale Realization 7795900 111.37 6125640 111.37
E Margin 2280950 32.58 896230 16.29

 *After deduction of non-cost items i.e Rent and COVID Protection expense.

** adjusted figures


– Cost is worked out for actual production done.

– Non-productive expenses are identified and not considered in cost sheet

– Cost for idle capacity i.e 25000 MT (95000-70000) is ignored and average capacity is considered as actual capacity.

– For Fixed Expenses, we may calculate Cost PU at revised normal capacity i.e 57518 which will reduce Cost PU further. But we have worked out at actual production.

– Non Cost expenses to the tune of Rs. 285540/- (Rs 231000+54540) will be part of reconciliation with Profit as per Financial statements.

– One should maintain highest level of capacity utilization to have less cost of production to make the products viable.


For the FY 2020-21, based on Generally Accepted Cost Accounting Principles (GACAP), we need to readjust our Installed and Available capacity to know the actual utilized capacity and accordingly Variable and Fixed cost to be charged to products or services. Expenses incurred in abnormal circumstances should not be part of cost sheet of any product or service. Otherwise products or services may get costly and become unviable in market. All related disclosure must be given in cost sheets for better understanding and decision making. By identifying the non-cost items or abnormal costs and by not charging them to production will depict actual position of company’s operations. Company may have losses in its financials but operationally it will be in profit and its products or services will be viable in market.


Author Bio

Qualification: CMA
Company: ANIL SHARMA & CO. (Cost Accountants)
Location: CHANDIGARH, Chandigarh, IN
Member Since: 27 Aug 2019 | Total Posts: 15
Practicing Cost Accountant since 2003 at Chandigarh View Full Profile

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  1. Yog Raj Wadhwa says:

    Most of the times abnormal costs are taken out as a reconciliation item.
    But the impact of actual utilisation of capacity against Installed capacity, Available capacity, Planned capacity is not considered even by the practising Cost Accountants.
    You have very well explained the method to account for the impact of same.
    Please include in your next article the impact of capacity utilisation when there are in multiple products with multi stage production and available capacity varies with the product mix

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