Treatment of Special Expenses in Cost Accounting
Certain items need special treatment in Cost Accounting. In this juncture, we have to discuss the treatment of some special expenses in cost accounts.
1. Research and Development Cost (CAS 18)
As per CAS 18, the treatment of Research and Development Cost (CAS 18) is as follows:-
Development cost: Development cost is the cost which is incurred to apply the research finding or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use.
Research Cost: It is the cost of original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Research, and Development Costs shall include all the costs that are directly relatable to research and/or development activities.
To find out the Research and Development Costs, add all the following costs
1. The cost of materials and services consumed in Research, and Development activities.
2. Cost of bought out materials and hired services less trade discounts, rebates, taxes and duties refundable.
3. The salaries, wages of R &D Staff.
4. The depreciation of equipment and facilities, and other tangible assets.
5. Amortization of intangible assets which are used for Research, and Development activities;
6. Overhead costs, other than general administrative costs, related to Research, and Development activities.
7. Costs incurred for carrying out Research, and Development activities by other entities and charged to the entity; and
8. Expenditure incurred in securing copyrights or licences.
9. Expenditure incurred for developing computer software.
10. Costs incurred for the design of tools, jigs, moulds and dies.
11. Other costs that can be directly attributed.
Then substract:
Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to Research, and Development Activity,
Other Points
Following costs shall not form part of the Research, and Development Cost.
Fines, penalties, damages and similar levies paid to statutory authorities or other third parties.
Assignment of costs
Research, and Development costs attributable to a specific cost object shall be assigned to that cost object directly.
Research, development costs that are not attributable to a specific product or process shall not form part of the product cost.
Development cost which results in the creation of an intangible asset shall be amortized over its useful life.
Assignment of Development Costs shall be based on the principle of “benefits received”.
Research and Development Costs incurred for the development and improvement of an existing process or product shall be included in the cost of production
2. Preliminary expenses
Treatment of Preliminary expenses can be analyzed as per Income Tax Act 1963
Amortization of certain preliminary expenses (Section 35D)
Assessment Year 2021-2022.
1. Deduction Allowed –Amount equal to 1/5 th of the following preliminary expenses for the five successive previous years
a. Expenditure in connection with-
i. Preparation of feasibility report
ii. Preparation of project report
iii. conducting market survey or any other survey necessary for the business of the assesse
iv. engineering services relating to the business of the assesse
b. legal charges for drafting any agreement between the assessee and any other persons for any purpose relating to the setting up or conduct of the business of the assesse,
c. where the assesse is a company, also expenditure-
i. by way of legal charges for drafting the Memorandum and Articles of Association of the company;
ii. on printing of the Memorandum and Articles of Association
iii.by way of fees for registering the company under the provisions of the companies Act,1956
iv. in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing ,printing and advertisement of the prospectus;
d. Such other items of expenditure as may be prescribed
2. Where the aggregate amount of the expenditure referred to above exceeds an amount calculated at 5%-
a. of the cost of the project or
b. Where the assesse is an Indian company, at the option of the company, of the capital ,of the capital employed in the business of the company
the exceeds shall be ignored for the purpose of computing the deduction allowable under sub-section (1)
3.where the assesse is a person other than a company or a co-operative society ,no deduction shall be admissible under sub-section (1) unless the accounts of the assesse for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288,before the specified date referred to in section 44 AB and the assesse furnishes for the first year in which the deduction under this session is claimed, the report of such audit by that date in the prescribed form.
Assessment Year 2022-2023.
No change in the Assessment Year 2022-2023.
In Cost Accounting, the amount of preliminary expenses written off should be excluded.
3.Defectives
Defectives: Materials, products or intermediate products that do not meet quality standards. This may include reworks or rejects. (As per CAS 6).
Treatment in Cost Accounts
The material cost of normal scrap/ defectives
It shall be included in the material cost of goods manufactured.
Material Cost of abnormal scrap /defectives
It may be treated as loss in the Costing P/L A/C after giving credit to the realizable value of such scrap / defectives.
4.Waste
Waste: Material lost during production or storage and discarded material which may or may not have any value.-(As per Generally accepted cost accounting principles.)
Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall be absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from disposal.
Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc., before the material is received shall be absorbed in material cost to the extent they are normal, with corresponding adjustment in the quantity. The adjustment for moisture will depend on whether dry weight is used for measurement.
Any abnormal cost shall be excluded from the material cost.
5. Scrap (As per CAS 6)
Scrap: Discarded material having no or insignificant value and which is usually either disposed off without further treatment (other than reclamation and handling) or reintroduced into the process in place of raw material.-(As per Generally Accepted Cost Accounting Principles)
The material cost of normal scrap/ defectives which are rejects shall be included in the material cost of goods manufactured. The material cost of actual scrap / defectives, not exceeding the normal shall be adjusted in the material cost of good production.
Material Cost of abnormal scrap /defectives should not be included in material cost but treated as loss in the costing P/L A/C after giving credit to the realizable value of such scrap / defectives.
6. Spoilage (As per CAS 6)
Spoilage: Production which cannot meet the quality requirements or specifications and cannot be rectified economically.
The cost of normal spoilage should be distributed over good output. Cost of abnormal spoilage should be debited to Costing P/L A/C.
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