TaxTMI 
TaxTMI 
GUIDANCE NOTE ON COST ACCOUNTING STANDARD ON DIRECT EXPENSES (CAS-10)
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, 1956 which is engaged in production, processing, manufacturing or mining activities have to maintain cost accounting records in accordance with the Generally Accepted Cost Accounting Principles (GACAP) and Cost Accounting Standards issued by the Institute, to the extent these are found to be relevant and applicable. The above Rules further provide that these will be applicable to companies wherein: (a) aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or (b) the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or (c) the company's equity or debt securities are listed or are in the process of listing on any stock exchange whether in India or outside India. The Companies (Cost Audit Report) Rules 2011 cast a duty on a Cost Auditor appointed under Section 233B of the Companies Act, 1956 to certify inter alia that books and records maintained by the company are in conformity with the Cost Accounting Standards issued by the Institute to the extent th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....special design was to be developed for a tool as per customer requirements and such expenses incurred in designing of a tool for the product would be treated as Direct Expenses for the product. Chapter 2 Definition 4. Definitions 4.1 Abnormal cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/ or due to some abnormal situation of the production or operation.^[1] 4.2 Cost Object: This includes a product, service, cost centre, activity, sub-activity, project, contract, customer or distribution channel or any other unit in relation to which costs are ascertained.^[2] 4.3 Direct Employee Cost: The cost of employees which can be attributed to a cost object in an economically feasible way.^[3] 4.4 Direct Expenses: Expenses relating to manufacture of a product or rendering a service, which can be identified or linked with the cost object other than direct material cost and direct employee cost^[4]. 4.5 Direct Material Cost: The cost of material which can be attributed to a cost object in an economically feasible way^[5]. 4.6 Finance Costs: Costs incurred by an enterprise in connection wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... taxes and other expenditure (freight/transport). Direct Expenses are to be net of any discount, rebate, taxes and duties (VAT/CENVAT) refundable, if any. If any design and drawing is imported, custom duty payable/paid, insurance and freight/courier charges if any, will form part of the cost. Supplier will be paid full amount as per invoice. In case Excise Duty/Cess and VAT are refundable, cost of these will be net of these refunds. 5.2.2 Direct Expenses other than those referred to in paragraph 5.2.1 shall be determined on the basis of amount incurred in connection therewith. Dies, tools, scaffolding, and so on are sometime produced internally. Production Cost of these items is to be determined taking into account the direct material cost, direct employee cost, Direct Expenses and production overhead. As and when a decision is taken to produce dies/tools in house, all the above expenses are recorded. Direct material cost is to be measured as per paragraph 5.1 of CAS on Material Cost (CAS-6). The receipt of material shall be valued at purchase price including duties and taxes, freight inwards and other expenditure attributable to procurement. The material....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not include imputed costs. In case of goods produced for captive consumption, treatment of imputed cost shall be in accordance with Cost Accounting Standard - 4 (CAS-4). Imputed cost does not involve at any time any outright expense or cash outlay. As such it is to be excluded from Direct Expenses. However in case of goods produced for captive consumption, imputed cost is to be considered while determining the cost of goods produced as per Cost Accounting Standard - 4 (CAS-4). Paragraph 5.14 of CAS-4 provides that In case any input material, whether of direct or indirect nature, including packing material is supplied free of cost by the user of the captive product, the landed cost of such material shall be included in the cost of production. Landed cost of inputs received free of cost should be calculated as per the guidelines relating to material cost. Paragraph 5.15 of CAS-4 further provides that imputed cost is to be charged for Moulds, Tools, Dies & Patterns etc received free of cost. The amortization cost of such items shall be included in the cost of production. Amortisation should be done on the basis of estimated production that can be achieved during the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the cost accounting principles applied for the measurement of the Direct Expenses should be made only if, it is required by law or for compliance with the requirements of a cost accounting standard, or a change would result in a more appropriate preparation or presentation of cost statements of an organisation. Principles applied for determining the Direct Expenses be followed consistently. For example profit sharing bonus paid to employees was not to be treated as a part of production cost but of "Total cost of Sales" under previous Cost Audit Report Rules 1996.This principle was being followed consistently but due to change in the principle with the notification of the Companies (Cost Accounting Records) Rules, 2011 bonus is now part of the employee cost and forms part of cost production. Thus change in cost accounting principle/law for determining the cost can be made when required by any law as illustrated above or for compliance with cost accounting standards or it results in more appropriate presentation of cost statement. Chapter 4 Assignment of Costs 6. Assignment of costs 6.1 Direct Expenses that are directly traceable to the cost object shall ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ample: Royalty of Rs 10.25 lakhs has been determined @ 3% of cost of Production. 8.1.3 Where Direct Expenses are accounted at standard cost, the price and usage variances If the Direct Expenses are accounted at standard cost, the price and usage variances are to be disclosed in the cost statement. 8.1.4 Direct Expenses representing procurement of resources and expenses incurred in connection with resources generated. Disclosure is to be made for Direct Expenses both for procurement of resources and resources generated internally: Example: Direct Expenses : 1. Special Design and Drawing procured Rs 250,000 2. Tools & Dies produced internally: Material Rs 36000 Labour Rs 12000 Overhead Rs 6000 Total Rs 54,000 8.1.5 Direct Expenses paid/ payable to related parties^[9]. The related parties have been defined under the Companies (Accounting Standards) Rules, 2006. If Direct Expenses is paid /payable for any supply procured from or supplied to related parties, its relationship, nature of transaction viz quantity, rate, other terms/ conditions of procurement are to be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iality of Direct Expenses. If it forms material part of the Direct Expenses and can be identified with a product the same shall be disclosed in the cost statement otherwise, disclosures may be by way of foot note. 8.4 Any change in the cost accounting principles and methods applied for the measurement and assignment of the Direct Expenses during the period covered by the cost statement which has a material effect on the Direct Expenses. Where the effect of such change is not ascertainable wholly or partly the fact shall be indicated. Cost Accounting principles, and methods applied for the measurement and assignment of Direct Expenses are to be applied consistently between one period and another uniformly applied for different Direct Expenses. If any change is made in these principles and methods which results in material impact on the cost of product, the same shall be disclosed in the cost statement or by a foot note. In case the impact of change in principles and methods of cost accounting is not ascertainable, the fact is to be disclosed by a note to the cost statements. ANNEXURE I (CAS-10) COST ACCOUNTING STANDARD ON DIRECT EXPENSES The following i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by an enterprise in connection with the borrowing of funds. This will include interest and commitment charges on bank borrowings, other short term and long term borrowings, amortisation of discounts or premium related to borrowings, amortisation of ancillary cost incurred in connection with the arrangements of borrowings, finance charges in respect of finance leases, other similar arrangements and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to the interest costs^[15]. The terms Finance costs and Borrowing costs are used interchangeably. 4.7 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose.^[16] 4.8 Overheads: Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object.^[17] 4.9 Standard Cost: A predetermined cost of resource inputs for the cost object computed with reference to set of technical specifications and efficient operating conditions. Standard costs are used as scale of reference to compare the actual costs with the standard cos....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be treated as part of the Direct Expenses. Variances due to abnormal reasons shall not form part of the Direct Expenses. 5.7 Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to any Direct Expenses shall be reduced for ascertainment of the cost of the cost object to which such amounts are related. 5.8 Any abnormal portion of the direct expenses where it is material and quantifiable shall not form part of the Direct Expenses. 5.9 Penalties, damages paid to statutory authorities or other third parties shall not form part of the Direct Expenses. 5.10 Credits/ recoveries relating to the Direct Expenses, material and quantifiable, shall be deducted to arrive at the net Direct Expenses. 5.11 Any change in the cost accounting principles applied for the measurement of the Direct Expenses should be made only if, it is required by law or for compliance with the requirements of a cost accounting standard, or a change would result in a more appropriate preparation or presentation of cost statements of an organisation. 6. Assignment of costs 6.1 Direct Expenses that are directly traceable to the cost object....