Case Study: – Absorption of expenses related to non-operating mines/plants to operating mines/plants and expenses of closed mines/plants are merged with operating & running mines/plants under Consolidated Cost Statement for product company as whole or expenses related to non-operating mines/plants to be shown in Reconciliation Statement between Costing & Financial Profit/(Loss) as a separate line item giving description as un-absorbed fixed expenses due to non-operation of available capacity.

Fact:- matter relates to non-operative mines/plants. The company having expenditure incurred on such non-operative i.e. temporarily closed mines relates to necessary activities as per Directorate General of Mines Safety (DGMS) guidelines such as Pumping, De-watering, lighting, etc.

mines may be closed due to following reasons-

a. Permanently closed Mines/Plants.

b. Temporarily closed mines/plants due to safety reasons.

c. Temporarily closed due to not financially viable to run at present.

Notwithstanding the permanent or temporary closure of mines/plants owing to given reasons,

1. the nature of expenditure, even if essential, does not change its basic character of being non-operative fixed cost, which cannot be treated & absorbed in the cost of production of operative mines/plants. Further, there is no production, sale and revenue generation from the closed mines.

2. Incase the company is having more than one mine/plant, separate cost statements shall be prepared for the computation of mine/plant wise profitability, in nutshell we can say comparison of ‘Efficiency, Performance and Propriety plant wise.

3. And if expenses of non-operating mines reported in Cost Statement and merged with operating & running mines/plants under Consolidated Cost Statement, so cost per unit as computed will not represent true & fair result means cost per unit of production because expenses are considered of all mines/plants whether operating or non-operating but production quantity is only from operating mines/plants which makes Statistics absurd & misrepresenting.

Conclusion: -Therefore, no cost statement is required to be prepared for such non-operating mines/plants and further not to be merged in consolidated cost statement of operating mines/plant. such expenditure related to non-operating mines/plants is to be correctly reported in Reconciliation Statement between Costing & Financial Profit/(Loss) as a separate line item giving description as un-absorbed fixed expenses due to non-operation of available capacity.

Author Bio

Qualification: CMA
Company: SARK & Co.(Cost Accountants)
Location: Delhi, Delhi, India
Member Since: 24 Jun 2020 | Total Posts: 2

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