Through this article, I intend to highlight the important aspects of latest INDAS-2 and latest CAS-6 in a simple way.
Important Points are as follows
1. Matching Concept is the relevant concept for Inventories
Inventories Consists of the following
• Held for sale in the ordinary course of business (finished goods)
• In the process of production of such sale (raw material and work-in-progress)
• In the form of materials or supplies to be consumed in production process or in the rendering of services (stores, spares, raw materials, consumables)
3. Measurement of Inventories
Cost OR Net realizable value
whichever is less
4. Cost= Cost of Purchase +Cost of Conversion +Other Costs
A. Cost of Purchase =Purchase price-Trade Discount –Rebates +Duties and non-refundable taxes +Carriage inwards+ Frieght +GST+ Forwarding Charges for external transport +Transport Insurance+ Cost for a letter reference+Commission and brokerage paid+ Handling Costs+ Other expenditures directly attributable to the acquisition of finished goods, materials and services
B. Cost of conversion .
i. Direct labour
ii. Direct expenses
iii. Fixed Production Overheads on normal capacity
iv. Indirect material
v Indirect labour
vi. Other Variable Production Overheads
vii. Joint Product costs less net realizable value of by-products
viii. Normal wastage Cost of materials
ix. Repairs and maintenance
C. Other costs.
Only if incurred in bringing inventories to present location and conditions
A detailed statement showing costs is as follows
. Direct Materials (Including Purchase Cost)
. Direct wages
. Direct Expenses
Add: Factory Overheads
Add: Office and Administration Overhead (only a portion is required)
5. Exclusions from Cost of Inventories.
Following Costs are excluded from the cost of Inventories
1. Abnormal amounts of wasted materials, labour and other production cost.
2. Storage cost unless those costs are necessary in the production process before further stage
3. Administrative overheads
4. Selling and distribution Cost
6. Cost of Inventories of a service provider.
At the cost of their production.
This is Omitted by the companies (Indian Accounting Standards) Amendment Rules ,2018 w. e. f 01/4/2018.
7. Techniques of measurement of Cost of inventories
i. Standard Cost—-By considering normal levels of materials and supplies, labour, efficiency and capacity utilization.
ii. Retail Method—it is used in retail industry
8. Cost formula
a. Specific Identification method
This method means directly linking the cost with specific item of inventories.
The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.
b. Where Specific Identification method is not applicable
i. First in First Out (FIFO)
ii. Weighted Average Cost
An entity must use same cost formula for all inventories having a similar nature and use within the entity.
9. Net Realizable Value means the following:-
Estimated Selling Price
Estimated Cost of Completion and estimated cost to make sale
10. Estimation of net realizable value
If the finished product in which raw material and supplies used is sold at cost or above cost ,then the estimated realizable value of raw material and supplies is considered more than its cost.
If finished product in which raw material and supplies used is sold below cost. Then the estimated realizable value of raw material or supplies is equal to replacement price of raw material or supplies.
Expenses—-Carrying amount of the inventory (cost of goods sold)—-When sold
Write down to net realizable value—-All Loss of inventories are recognized as an expense in the period the written down or loss occurs
Reversal of write down—reduction in expense in the period the reversal occurs
12. Disclosures in the financial statement
The financial statement should disclose the following
Accounting policies adopted in measuring inventories
Classification of Inventories
Carrying amount of inventories carried at fair value less cost to sell
Cost formula used.
Amount of inventories recognized as an expense
Write down /reversal of write down
Carrying value of Inventories Pledged.
CAS-6 Material Cost
This standard is issued by Institute of Cost Accountants of India. It deals with principles and methods of determining the Material Cost.
1. As per this standard material means the following_
a. raw materials,
b. process materials,
d. manufactured / bought out components,
g. semi -finished goods,
h. consumable stores,
i. spares and other indirect materials.
2. 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.
3. This Standard gives definition about the following_
i. Abnormal cost:
ii. Administrative overheads:
iii. Cost Object
. iv. Defectives
vii. Intermediate Product
viii. Direct Materials
ix. Indirect Materials
x. Material Cost
xi. Production overheads
xii. Property, plant and equipment
xiv. Standard Cost.
xv. Waste and spoilage:
4. Principle of Valuation of receipt of materials
The material receipt should be valued at purchase price. You should not consider net realisable value
Following are the important points in this connection
i. Costs which are to be included
Duties and taxes, freight inwards, insurance, and other expenditure directly attributable to procurement that can be quantified with reasonable accuracy at the time of acquisition.
ii. Items such as spare parts, stand-by equipment and servicing equipment are materials if they do not fulfil the definition of property, plant and equipment
iii. Normal loss or spoilage of material and Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc. should be adjusted
Following are to be Excluded
a. Trade discounts, rebates, taxes and duties refundable to be credited by the taxing authorities
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.
b. Finance costs incurred in connection with the acquisition of materials
c. Any demurrage or detention charges, or penalty levied by transport or other authorities
d. 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.
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. Principle of valuation of issue of material
i. 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.
ii. Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material cost.
iii. Any abnormal cost shall be excluded from the material cost.
iv. 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.
6. Assignment of costs
i. Assignment of material costs to cost objects is to done as per this standard.
ii. Where the material costs are not directly traceable to the cost object, these may be assigned on a suitable basis like technical estimates.
iii. 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.
iv. The subcontract charges related to materials shall be treated as direct expenses and assigned directly to the cost object.
v. 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.
vi. 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.
7. Presentation and disclosure of material cost is to be as per this standard