The government is considering a proposal to do away with the current system of calculating a product’s cost through a fixed format, a move that will bring in flexibility and reduce compliance costs for companies.
In turn, the Institute of Cost and Works Accountants of India (ICWAI), the apex body regulating the cost accounting profession in India, would develop 39 cost accounting standards, like the ones for financial accounting.
These are the recommendations of an expert committee constituted by the Ministry of Corporate Affairs (MCA) to review the working of the cost accounting profession in India.
The movement from a fixed format prescribed by the government towards accounting standards, which is being termed as principle-based accounting, will give greater freedom to companies to treat different components of cost in an effective manner.
“A principle-based system has a universal application and hence, maintenance of cost accounting records by the corporate sector should be shifted from the existing rule or format-based mechanism to a principle-based mechanism,” said Kunal Banerjee, president of ICWAI.
The eight-member expert group, which was constituted in 2008 to review the cost accounting standards, made this recommendation in its report after seeking opinions of all the stakeholders.
Another major recommendations of the committee is to bring all manufacturing companies with a paid-up capital of Rs 50 crore and above under the ambit of mandatory cost audit. Currently, only specific products of 44 industries are covered under cost audit.
Moreover, the government has the discretion to order cost audit for firms within these 44 industries. But the committee has suggested dispensing with executive discretion. This is likely to bring more than 20,000 firms under cost audit, compared with around 2,000 companies that are being audited at present.
On the proposed change towards cost accounting standards, Banerjee said the changing scenario, where companies were shifting to a multi-product portfolio, needed a system of generally accepted cost accounting principles.
The government has been prescribing different “rules” for different products from 1965 onwards, despite the fact that cost accounting principles remain same across products and industries. Prescription of such rules under this methodology has led to multiple formats for different products/industries , resulting in companies maintaining multiple and non-integrated records.
ICWAI has been saying that the principle of arriving at the cost of a product should be the same, irrespective of the type of industry, and only the measurement, assignment and reporting mechanism may differ from industry to industry.
ICWAI has identified 39 areas to be covered under this principle. It has already come out with five cost accounting standards (CAS) — CAS-1, CAS-2, CAS-3, CAS-4 and CAS-5.