Basics of Cost Audit

Queston 1 June 2024 (7M)

What is the Scope of Cost Audit? Explain.

Answer

1. Cost Audit is an independent examination of cost statements, cost records and other related
information of an entity, with a view to express an opinion thereon.
2. It refers to the detailed verification of the correctness of costing techniques, costing systems,
and cost accounts. It is necessary to ensure that records maintained for the purpose are
accurate and correct to drive entity’s decision making process.
3. The primary objective of „Cost Audit‟ is ensuring accuracy of cost data, accumulation and exact
computation of the cost of a product. However, the vast scope of Cost Audit works as a mirror
of entity’s performance.
4. The wider scope of Cost Audit can help
a) Control over element-wise cost
b) Help in determining Sales Price and margin
c) Assist Management in decision-making
d) Necessity and results from each of the activity performed
e) Setting of Standards and budgetary controls
f) Minimizing wastages, if any
g) Accuracy of inventory valuation
h) Overall efficiency improvement of the entity
5. Hence, Cost Audit not only to be considered as a Compliance tool (where the same is mandatory),
the outcome is far reaching to go ‘beyond compliance’

Queston 2 Dec 2023(7M)

What are the benefits of Cost Audit?

Answer

The Expert committee formed by the Government of India to study the Cost Audit scenario in the
country, highlighted the following benefits of cost information:

a) Cost Information Use: Enables organizations to structure, understand, and communicate costs
with stakeholders.
b) Assessing Performance: Costing is vital for evaluating organizational performance, shareholder
and stakeholder value, and operational efficiency. It provides insights into resource efficiency,
waste management, and allocation policies.
c) Scope of Costing: Covers product, process, and resource-related information across the
organization's functions and value chain. It helps appraise actual performance against strategies.
d) Decision Support: Effective costing supports both regular and non-routine decisions by: •
• Meeting customer expectations and profitability targets.
• Assisting in continuous improvement of resource utilization.

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 • Guiding product mix and investment decisions.
e) Data Consistency: Working from a common data source ensures reconcilable output reports for
different audiences.
f) System Integration: Integrating databases and information systems enhances the efficiency
of costing information and reduces data manipulation.

Question 3 June 2023(6M)

What are the social objectives of cost audit ?

Answer

a) Verifying whether the pricing of the products is justified as per the product and quality are
concerned.
b) Removing the disparities, if any, in the pricing of products and/or services.
c) Looking into that no cost based economic imbalance may occur in product and /or services.
Facilitating in the global market cost competitiveness of the products.
d) Ensuring the efficient utilization of resources

Question 4 Dec 2021 (4M)

Describe about general objectives of cost audit ?

Answer

a) Verification of cost accounts with a view to ascertaining that these have been properly
maintained and compiled according to the cost accounting system followed by the enterprise.
b) Ensuring that prescribed procedures of the cost accounting records rules are duly adhered to.
Detection of errors and fraud.
c) Verification of the cost of each “cost unit” and “cost centre” to ensure that these have been
properly ascertained.
d) Determination of inventory valuation.
e) Facilitating the fixation of prices of goods and services.
f) Periodical reconciliation between cost accounts and financial accounts.
g) Ensuring optimum utilization of human, physical and financial resources of the enterprise.
h) Detection and correction of abnormal loss of material and time
i) Advising management, on the basis of inter-unit/inter-firm comparison of cost records, as
regards the areas where performance calls for improvement.
j) Promoting corporate governance through various operational disclosures to the directors.
k) Helping the entity in matters of Anti-Dumping Duty, valuation of cost of production of goods and
services, anti-profiteering (e.g. GST), price controls (e.g. Pharma industry in the past), etc.

Question 5 ICMAI Material Question

What is Genesis of Cost Audit ?

Answer

Refer concept 3

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Cost Records and Audit Rules _ 2014
Main Questions

Question 1 June 23(22)(10M),Dec 2018(16)(10m)

The following figures are obtained from the Cost Accounting Records of Vennela Ltd. :

Amount in ₹lakhs

Year ended 31st March 2023 2022

Net Sales 7,120 5,700
Other Income 450 300
Export Incentives 80 60
Increase in Value of Stock of Finished Goods 30 15
Raw materials consumed 2,640 2,160
Direct wages, salaries, bonus, gratuity etc 660 528
Power & Fuel 360 288
Stores and spares 240 210
Other manufacturing overheads 645 555
Administrative Overheads :
Audit fees 54 45
Salaries & commission to directors 72 60
Other overheads 390 330
Selling and distribution overheads :
Salaries & Wages 54 45
Packing and forwarding Other overheads 30 24
375 300
Total depreciation 180 180
Interest Charges :
On working capital loans from Bank 90 75
On fixed loans from IDBI 135 105
On Debentures 45 45
Tax paid including provisions 474 300
Dividend paid 630 345
Dividend Distribution Tax 110 60
You are required to calculate the following parameters as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2023 and March 31, 2022:

i. Value addition
ii. Earnings available for Distribution
iii. Distribution of Earning to the different claimants

Solution

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 Vennela Ltd

Calculation of value addition Amount in ₹lakhs

Particulars Current yr Previous yr

2022-23 2021-22
Value Addition:
Net Sales 7,120 5,700
Add: Export incentives 80 60
Add:/ (Less) Adjustment In Finished Stocks 30 15
7,230 5,775
Less: Cost of bought out input:
(a) Cost of Raw materials consumed 2,640 2,160
(b) Consumption of stores and spares 240 210
(c) Power & Fuel 360 288
(d) Other overheads 1,584 1,329
(645+54+390+30+375+90) = 1584
(555+45+330+24+300+75) = 1329
Total cost bought out inputs 4,824 3,987
Value Added: 2,406 1,788
Earnings Available for Distribution

Particulars Current yr Previous yr

2022-23 2021-22
Value Added: 2,406 1,788
Add: Other income 450 300
Add: Extra ordinary income - -
Earnings available for distribution 2,856 2,088
Distribution of Earnings

Distribution of earnings to:

a) Employees as salaries and wages, bonus, gratuity etc 714 573
Directors- Salaries and commission 72 60
b) Shareholders as dividend 630 345
c) Company as retained funds (including depreciation) 676 600
d) Government as taxes
Dividend Distribution Taxes 110 60
Income taxes paid (including provisions) 474 300
584 360
e) Providers of Capital/Fund as Interest on Debentures:
Interest on Debentures: 45 45
Interest on Fixed Loans from IDBI 135 105
Total distribution of earnings 2,856 2,088

Working of Retained Earnings:

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 Earnings Available for Distribution 2856

Employee Cost – 714

Directors Salaries & Commission – 72

Dividend – 630

Taxes – 584

Interest – 180 = 676

Question 2 Dec 2019(16)(8M)

The following parameters are extracted from the Cost Accounting Records of ALCOBOX Ltd.
multi products manufacturing company for two years: (Amount in ₹ lakh)

Year ended 31st March 2019 2018

Gross Sales including GST 28,560 27,790

GST 4,130 3,920

Other Income — —

Raw materials consumed 15,960 14,840

Direct wages and salaries 490 450

Power and fuel 350 320

Stores and spares consumed 80 70

Repairs and maintenance 70 60

Depreciation charged to production cost centers 220 210

Factory overheads:

Salaries and wages 70 60

Depreciation 30 30

Rates and taxes 15 14

Other overheads 75 66

Administrative overheads:

Salaries and wages 140 130

Rates and taxes 90 90

Other overheads 2,250 2,100

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Selling and distribution overheads:

Salaries and wages 100 80

Packing and forwarding 85 85

Depreciation 15 15

Other overheads 1,730 1,640

Interest 1,160 1,030

Bonus and gratuity 200 150

You are required to compute the following RATIOS as stipulated in PART -D, PARA-4 to the
Annexure of Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2019 and March 31, 2018.

(i) Profit before Tax (PBT) to Value Added

(ii) Value Added to Net Sales

(iii) Profit before Tax (PBT) to Net Revenue from Operations

Solution

Calculation of Profit Before Tax (PBT) (Amount in ₹ lakh)

Year Ended 31st March 2019 2018

Gross Sales inclusive of GST 28560 27790

Less: GST 4130 3920

Net Sales 24430 23870

Net Revenue from Operations 24430 23870

Cost of Sales

Raw material consumed 15960 14840

Direct wages and salaries 490 450

Power and fuel 350 320

Stores and spares consumed Repairs and maintenance 80 70

70 60

Depreciation charged to production centers 220 210

Factory over heads (including depreciation) 190 170

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Administration overheads 2480 2320

Selling and distribution overheads (inclusive depreciation) 1930 1820

Interest 1160 1030

Bonus and gratuity 200 150

Total B 23130 21440

Profit before Tax (PBT) (A -B) 1300 2430

Calculation of Value Added (Amount in ₹ lakh)

2019 2018

Net Sales (A) 24430 23870

Less: Cost of bought out of inputs:

Direct materials consumed 15960 14840

Stores 8i spares consumed 80 70

Power and fuel 350 320

Repairs and maintenance 70 60

Overheads (exclusive salaries, wages,

rates & taxes and depreciation) 4140 3891

Total cost of bought out of inputs (B) 20600 19181

Value Added (A-B) 3830 4689

2019 2018

(i) Profit before tax (PBT) to Value Added 1300/3830 2430/4689

33.94% 51.82%

(ii) Value Added to Net Sales 3830/24430 4689/23870

15.68% 19.64%

Profit before tax (P BT) to net revenue from operations 1300/24430 2430/23870

5.32% 10.18%

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Question 3 June 24(22)(7M)

The Cost Accountant of TRINCUS TEXTILES MILLS LTD. has arrived at a Profit of ₹
20,10,500 based on Cost. Accounting Records for the year ended March 31, 2023. Profit as
per Financial Accounts is ₹ 22,14,100.

As a Cost Auditor, you find the following differences between the Financial Accounts and Cost
Accounts:

NO PARTICULARS AMOUNT ₹
1 Profit on Sale of Fixed Assets 2,05,000
2 Loss on Sale of Investments 33,600
3 Voluntary Retirement Compensation included in Salary & Wages in F/A 50,25,000
4 Donation Paid 75,000
5 Insurance Claim relating to previous year received during the year 5,08,700
6 Profit from Retail trading activity 32,02,430
7 Interest Income from Inter-Corporate Deposits 6,15,000
8 Decrease in value of Closing WIP and Finished goods inventory
as per Financial Accounts 3,82,06,430
as per Cost Accounts 3,90,12,500
You are required to prepare a Reconciliation Statement between the two Accounts for the year
ended March 31,2023.

Solution

Reconciliation of Profit between Cost and Financial Accounts

for the year ended March 31, 2023

₹ ₹
Profit as per Financial Accounts: 22,14,100
Add: Loss on sale of investments 33,600
Add: Voluntary Retirement compensation included in salary 50,25,000
and wages in F/A - Not included in cost A/c 75,000 51,33,600
Add: Donation paid 73,47,700
Less: Profit on Sale of Fixed Assets-Not considered in cost A/c 2,05,000
Less: Receipts of insurance claim related to previous year 5,08,700
Less: Profit from Retail trading activity 32,02,430
Less: Interest income from inter-corporate deposit-not considered in 6,15,000
cost accounts
Less: Difference in valuation of stock:
Decrease in inventories as per cost accounts 3,90,12,500
Decrease in inventories as per financial accounts (–) 3,82,06,430 8,06,070 53,37,200
Profit as per Cost Accounts 20,10,500

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Question 4 DEC2023(22)(7M),June 2017(16)(8m)

Auto Parts Manufacturing Company Ltd. showed a profit for the year 2022-23 as ₹ 35,46,700.
During the course of Cost Audit, the followings transactions were noticed:

(i) an old machine with net value of ₹ 6,54,000 was sold off for₹ 9,30,000,

(ii) dividend income was received amounting to ₹84,500 from investments,

(iii) a sum of ₹ 58,000 was spent towards CSR commitment,

(iv) the company was engaged in trading activity where purchase of goods was ₹13,50,000 and
sales was ₹13,42,300, after incurring ₹ 40,800 as expenditure,

(v) some renovation work was carried out at a cost of ₹ 7,75,000 and its useful life was only
for five years, and

(vi) the closing inventory of raw material was undervalued ₹29,600 and that of finished goods
was overvalued ₹65,400 in the financial records.

Work out the Profit as per the Cost Accounts.

Solution

Reconciliation of Profit between Cost Accounts and the Financial Accounts of Auto Parts
Manufacturing Company Ltd. for the year 2022-23.

Particulars ₹ ₹
Profit as per the Financial Accounts 35,46,700
Add: Trading Loss 48,500
4/5th of Renovation Expenses Amortized 6,20,000
CSR Contribution 58,000 7,26,500
Less: Profit on Sale of Assets 2,76,000
Income from Investments 84,500
Net overvaluation of closing inventory in the Financial records
(65,400 - 29,600) 35,800 (-) 3,96,300
Profit as per the Cost Accounts 38,76,900

Question 5 Dec 2023(16)(10M)

The profit as per financial accounts of M/s Kaling pong Himalaya Private Company for the year
2022-23 was ₹ 1,54,28,642. The profit as per Cost Accounting Records for the same period
was less. You are required to prepare a reconciliation statement and arrive at the profit as
per Cost Records. The following details are collected from the financial schedules and cost
accounting records:

Financial Cost Accounts

Accounts

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 Valuation of Stock
Opening: WIP 25,62,315 22,65,710
Finished Goods 2,65,47,520 2,92,18,950
Closing : WIP 42,75,640 37,36,346
Finished Goods 3,72,59,430 4,35,25,149
Interest income from inter-corporate deposits 6,15,340 —
Donations given 4,85,560 —
Loss on Sale of Fixed Assets 1,22,546 —
Value of cement taken for own consumption 3,82,960 3,65,426
Cost of Power drawn from own Wind Mill
— At EB tariff — 49,56,325
— At cost 36,20,370 —
Non-operating income 45,36,770. —
Voluntary retirement compensation 16,76,540 —
Insurance claim relating to previous year received during the 14,35,620 —
year

Solution

Computation in difference in Valuation of Stock

Financial Cost
Accounts Accounts
Opening (WIP & FG) 2,91,09,835 3,14,84,660
Closing (WIP & FG) 4,15,35,070 4,72,61,495
1,24,25,235 1,57,76,835
Reconciliation of Financial Profit and Costing Profit

₹ ₹
Profit as per Financial Accounts 1,54,28,642
Add: Difference in Stock Valuation 33,51,600
Loss on Sale of Fixed Assets 1,22,546
Donation not considered in Cost Records 4,85,560
Voluntary retirement compensation not included in cost 16,76,540 56,36,246
2,10,64,888
Less: Non-operating income 45,36,770
Less: Interest income from intercorporate deposit 6,15,340
Difference in value of cement taken for own consumption 17,534
Difference in valuation of windmill power 13,35,955
(₹49,56,325 -36,20,370)
Insurance claim relating to previous year 14,35,620 79,41,219
Profit as per Cost Accounts 1,31,23,669

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Question 6 Dec 2019(16)(8M)

The financial Profit and Loss Account of PANWOOD LTD, a manufacturing company for the
year ended 31st March, 2019, was ₹1,15,71,480. During the course of Cost Audit, it was
noticed the following :

(i) Some discarded assets sold off which fetched a profit of ₹ 95,000.

(ii) Interest was received amounting to ₹1,05,000 from outside the business investment.

(iii) Voluntary Retirement payment of ₹3,80,000 was not included in the Cost Accounts.

(iv) Some renovation work was carried out at a cost of ₹6,20,000 and its useful life was only
for five years.

(v) Donation of ₹1,28,000 towards CSR commitment was not considered in the Cost Accounts.

(vi) Insurance claim of ₹ 18,05,000 relating to previous year received during the year.

(vii) Loss on sale of investments amounts to ₹ 32,800.

(viii) The closing inventory of raw materials was undervalued ₹30,600 and that of finished
goods was overvalued ₹2,30,700 in the financial records.

(ix) Post retirement medical grant to the extent of ₹ 2,80,000 was not considered in Cost
Accounts.

(x) Profit from Retail trading activity amounting to ₹ 1,90,000.

You are required to prepare a Reconciliation Statement between two Accounts and work out the
Profit as per Cost Accounts.

Solution

Statement showing the Reconciliation of Profit and Loss between Cost and financial account
for the year ended 31st March, 2019.

Particulars ₹ ₹

Profit as per Financial Accounts. 11571480

Add: Expenses/Loss not considered in Cost Accounts

(a) Loss on Sale of Investments 32800

(b) Donation towards CSR Commitment 128000

(c) Post-retirement Medical grant 280000

(d) Voluntary Retirement payment 380000

(e) 4/5 of Renovation Expenses Amortized 496000 1316800

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Less: Incomes not considered in Cost Accounts

(a) Profit on Sale of old assets 95000

(b) Interest received from outside investment 105000

(c) Insurance claim for previous year received 1805000

(d) Profit from Retail Trading Activity 190000

(e) Effect of Undervaluation/overvaluation of closing inventory 200100 (2395100)

Profit as per Cost Accounts 10493180

Question 7 Dec-2017 (16)(8m)

i. What are ‘Books of Accounts’ as per the Companies Act, 2013? Do ‘Cost Records’ become
part of Books of Accounts?

ii. Is maintenance of Cost Accounting Records mandatory for a multi-product company where
all the products are not covered under the Rules, even if the turnover of the individual
products, which are covered under the Rules, is less than rupees thirty five crore?

Solution

(i) Section 2(13) of Companies Act, 2013 states that: “Books of Accounts” includes records
maintained in respect of-

(i) All sums of money received and expended by a company and matters in relation to which
receipts and expenditure take place;

(ii) All sales and purchases of goods and services by the company

(iii) The assets and liabilities of the company and

(iv) The items of cost as may be prescribed under section 148 in the case of company which
belongs to any class of companies specified under that section.

Section 148 of Companies Act 2013 empowers the “central government to specify audit of items of
costs in respect of certain companies”.

As per Rule 2 (e) of the Companies (Cost Records and Audit ) Rules 2014, “cost records” means books
of accounts relating to utilization of materials, labour and other items of cost as applicable to the
production of goods or provision of services as provided in Section 148 of the Act and such rules.

(ii) The Rules provide threshold limits for the company as a whole irrespective of whether all it‟s
products are as per the prescribed industry /sector provided under Table A or Table

B. The Rules do not provide any minimum product specific threshold limits for maintenance of Cost
Accounting Records and consequently the company would be required to maintain Cost Accounting

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 Records for the products covered under table A or Table B or both , even if the turnover of such
products is below rupees thirty five crore.

Question 8 Dec-2018 (16)(8m)

i. While accepting the offer of appointment as Cost Auditor of a company, what certificate
should be submitted by the Cost Auditor to the company ? Is the Cost Auditor required
to give any certificate with respect to his/her/its independence and ‘arm’s length
relationship’ with the appointing company ?

ii. A company has units in SEZ and in non-SEZ areas. What would be the applicability of
the Companies (Cost Records and Audit) Rules, 2014 on such a company with respect to
maintenance of cost accounting records and Cost Audit ?

Solution

i. The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act (the Cost and Works Accountants Act, 1959)
and the rules or regulations made thereunder ;

(b) The individual or the firm, as the case may be satisfies the criteria provided in Section
141 of the Companies Act, 2013 so far as may be applicable ;

(c) The proposed appointment is within the limits laid down by or under the authority of
the Act ; and

(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.

Yes, the Cost Auditor of a company is required to give a certificate to the Audit Committee in
respect of his/her/its independence and arm’s length relationship with the company. Moreover,
according to the Second Schedule, Part I, Clause 4 of the Cost and Works Accountants Act, 1959,
it amounts to professional misconduct when a cost Auditor expenses his/her/its opinion on cost and
pricing statement of any business or enterprise in which he/she, his/her firm or a partner of his/her
firm has substantial interest.

ii. Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 is specific and it has mandated
maintenance of cost accounting records for all products/activities listed under Table- A and
Table- B subject to threshold limits. No exemption is available to any company from maintenance
of cost accounting records one it meets the threshold limits. Hence, the above company would
be required to maintain cost accounting records for all its units including the ones located in the
special economic zone.

However, in view of the provisions of Rule 4(3) (ii) of the Companies (Cost Records and Audit) Rules,
2017, the units located in the special economic zone would be outside the purview of Cost Audit and
the company would not be required to include particulars of such units in its Cost Audit Report. The

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other units of the company located outside the special economic zone would be covered under Cost
Audit subject to the prescribed threshold limits.

Question 9 Dec-2018(16),June 2024(22)(7M),June2017(16)(8m)

What is the basis adopted to determine normal price with respect to related party transactions

Solution

As per item 24 of CRA 1, normal price means price charged for comparable and similar products in
the ordinary course of trade and commerce where the price charged in the sole consideration of
sale and such sale is not made to a related party. Normal price can be construed to be a price at
which two unrelated and non-desperate parties would agree to a transaction and where such
transaction is not clouded due to the proximity of the parties to the transaction and free from
influence though the parties may have shared interest. The basis adopted to determine normal price
shall be classified as under :

(i) Comparable uncontrolled price method

(ii) Resale price method

(iii) Cost plus method

(iv) Profit split method

(v) Transactional net margin method

(vi) Any other method, to be specified.

Question 10 Dec-2019 (16)(4m)

Healthcare Equipment Limited is engaged mainly in the production of Cardiac stents, Catheters,
Pacemakers and Intraocular lenses.

State below whether maintenance of Cost Records is applicable if the company fulfils turnover
criteria and is

(I) a foreign company having registered office at Mumbai.

(II) a company classified as a micro enterprise.

(III) a foreign company having only liaison offices at Delhi and Mumbai.

(IV) a domestic company whose average turnover of ₹ 40 crore for last two years has dropped
to ₹ 24 crore in FY 2018 -19.

Solution

(1) Healthcare Services is in non -Regulated sector (item 33 of B: non -Regulated sector) and any
company, domestic or foreign, having annual turnover of ₹ 35 crore or more from all its
products or services in the previous year shall maintain cost records. Therefore, the Rule is
applicable to a foreign company.

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 (2) Nothing contained in Companies (Cost Records and Audit) Rules shall apply to a company, which
is classified as a micro enterprise or a small enterprise as per the turnover criteria under
Micro, Small and Medium Enterprises Development Act.

(3) Nothing contained in serial number 33 shall apply to foreign companies having only liaison
offices in India.

(4) Once maintenance of cost records becomes applicable, it would be maintained on a continuous
basis in the subsequent years also even if the turnover of the company in the previous year
falls below threshold limit.

Question 11 Dec-2022 (16)

While accepting the offer of appointment as Cost Auditor of a company, what certificate should
be submitted by the Cost Auditor to the company?

Solution

The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not disqualified
for appointment under the Act (the Cost and Works Accountants Act, 1959) and the rules or
regulations made there under;

(b) The individual or the firm, as the case may be, satisfies the criteria provided in Section 141
of the Companies Act, 2013 so far as may be applicable;

(c) The proposed appointment is within the limits laid down by or under the authority of the Act;
and

(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the audit
firm pending with respect to professional matters of conduct, as disclosed in the certificate,
is true and correct.

The Cost Auditor is also required to give a certificate to the Audit Committee in respect of his
independence and arm’s length relationship with the company

Question 12 June 2018(16)(8m)

i. A Company meets the threshold limits for both maintenance of Cost Records and Cost
Audit in 2015-16 and, consequently, comes under the purview of the Rules in the year
2016-17. If the turnover of the company gets reduced to lower than the prescribed
threshold limit in 2016-17, state whether the Rules relating to Cost Records and Cost
Audit will be applicable for the year 2017-18?
ii. What would be the treatment of cost of consumption of electricity from a captive
generating plant and the applicability of Cost Audit to such captive generating plants?

Solution

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 i. Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that a company engaged
in the production of the goods and/or rendering of the services as prescribed, having an
overall turnover from all its products and/or services of Rupees thirty five crore or more
during the immediately preceding financial year, shall include cost records for such products
and/or services in their books of account. Since the threshold limit for applicability of
maintenance of Cost Accounting Records is met in 2015-16 (Previous Year), the Cost Records
are required to be maintained from 2016-17. Once the maintenance of Cost Records becomes
applicable, it would be maintained on a continuous basis in the subsequent years also. Following
the same line, Cost Audit will be applicable from 2016-17 and for every year thereafter. So
Cost Audit is applicable in 2017-2018 also.
ii. As per Rule 3(A)(2), of the Companies (Cost Records and Audit) Rules, 2014 amendment dated
14th July, 2016 dealing with generation, transmission, distribution and supply of electricity,
all companies having captive generation of electricity, whether covered under Audit or not
shall be required to maintain Cost Records. It may be noted that, in case of a company whose
product(s)/service(s) are covered under the Rules and it consumes electricity from the
captive generating plant, determination of cost of generation, transmission, distribution and
supply of electricity as per CRA-I would be mandatory since the cost of consumption of
electricity has to be at Cost. Hence, maintenance Cost Records for generation, transmission,
distribution and supply of electricity would be applicable. However, Cost Audit will not be
applicable to such captive plants, provided the entire generation is consumed captively and no
portion is sold outside.

Question 13 June 2019 (16)

During the course of audit as Cost Auditor, you have come across (I) some material deficiency
and (II) significant variation in material consumption over the previous year. State the provisions
of the Companies (Cost Records and Audit) Rules, 2014 in this regard.

Solution

Pursuant to rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014 read with the Cost
Audit Report in form CRA-3, if as a result of the examination of the books of account, the Cost
Auditor desires to point out any material deficiency or give a qualified report, he/she shall indicate
the same against the relevant para (i) to (vii) in the prescribed form of the Cost Audit Report giving
details of discrepancies he/she has come across. The report, suggestions, observations and
conclusions given by the cost auditor under this paragraph shall be based on verified data, reference
to which shall be made here and shall, wherever practicable, be included after the company has been
afforded an opportunity to comment on them.

The prescribed format for Cost Audit Report states that „Wherever, there is any significant
variation in the current year’s figure over the previous year’s figure for any item shown under each
para of the annexure to the cost audit Report, reasons thereof shall be given by the cost auditor.
Accordingly, any variation in material consumption during current year over the previous year shall
be clarified in Part B of Annexure to Cost Audit Report.

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 Question 14 Dec 2023(22)(7M)

Explain the term "Normal capacity vis a vis installed capacity" as defined in the Form CRA I

Solution

Para 18 of Form CRA 1 of CCRA Rules, 2014 states that Installed capacity is determined based on:

i. Manufacturers‘ Technical specifications

ii. Capacities of individual or inter-related production centers
iii. Operational constraints or capacity of critical machines or
iv. Number of shifts

Normal capacity shall be determined vis-a-vis installed capacity after carrying out following
adjustments:

i. Holidays, normal shut down days and normal idle time,

ii. Normal time lost in batch change over,
iii. Time lost due to preventive maintenance and normal break downs of equipment‘s,
iv. Loss in efficiency due to ageing of the equipment, or
v. Number of shifts.

Question 15 Dec 2023(22)(7M)

The cost Audit Report in CRA3 as submitted by the Cost Auditor contains more of Management
Audit Basics than mere data of Production and services Comment on same Justifying the reasons

Solution

i. The Cost Auditor has to report in CRA 3, whether the Cost Accounting System followed in a
manufacturing unit is adequate for determination of the fair cost of production.
ii. He has to report on the financial performance of the company as well as of the product under
cost audit, along with various ratios and offer comments on the ratios.
iii. He has to indicate the percentage of production in relation to the installed capacity expressed
in appropriate units of measurement.

Management by exception

a) He has also to state reasons for the shortfall in production bringing out clearly the extent to
which they are controllable both in short term as well as long term.
b) He has to give observations as regards variations, if any, in the rate of major raw materials,
power and fuel, etc. in terms of rate per unit as compared to previous year, if any.
c) He has to give details of wages and salaries including direct labor cost per unit of output and
as compared to the previous year.
d) He has to indicate the amount of overheads along with reasons for any significant variations in
expenditure incurred against the items of factory, administration, selling and distribution
overheads as compared with previous two years.

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Remedial Actions: In this case the following position emerges: the Cost Auditor may offer
suggestions as regard the following matters for improvements in performance of the company
under audit with reference to:-

a) Rectification of general imbalance in production facilities

b) Fuller utilization of installed capacity
c) Concentration on areas offering scope for cost reduction, increased productivity and key
limiting factors causing production bottlenecks; and
d) Suggesting improved inventory policies.

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Additional Questions

Question 1

The following figures are obtained from the Cost Accounting Records of Sinjini Ltd. a single
product manufacturing company:
Year ended 31st March 2023 2022
Net Sales 4,800 3,840
Other Income 300 200
Increase in Value of Stock of Finished Goods 20 10
Raw materials Consumed 1,760 1,440
Direct wages, Salaries, Bonus, Gratuity etc 440 352
Power & Fuel 240 192
Stores and Spares 160 140
Cess and local Taxes 120 100
Other manufacturing Overheads 430 370
Administrative Overheads:
Audit fees 36 30
Salaries & Commission to Directors 48 40
Other Overheads 260 220
Selling and Distribution Overheads:
Salaries & Wages 36 30
Packing and Forwarding 20 16
Other Overheads 250 200
Total Depreciation 120 120
Interest Charges:
On Working Capital Loans from Bank 60 25
On Fixed Loans from IDBI 90 75
On Debentures 30 30
Provision for Taxes 316 200
Proposed Dividends 420 230
You are required to calculate the following parameters as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2023 and March 31, 2022:

i. Value Addition
ii. Earnings available for Distribution
iii. Distribution of Earnings to the different claimants.

Solution

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 Sinjini Ltd.

Calculation of Value Addition Amount in ₹lakhs

Year ended March 31 2023 2022

VALUE ADDITION:
Net Sales 4,800 3,840
Add: Export Incentives - -
Add/Less: Adjustment in Finished stocks 20 10
4,820 3,850
Less: Cost of bought out input:
i. Cost of Raw materials consumed 1,760 1,440
ii. Consumption of stores and spares 160 140
iii. Power & Fuel 240 192
iv. Other overheads 1,056 861
(430+36+260+20+250+60) = 1,056
(370+30+220+16+200+25) = 861
Total cost bought out input 3,216 2,633
Value added 1,604 1,217
Earnings Available for Distribution

2023 2022
Value Added 1,604 1,217
Add: Other Income 300 200
Earnings Available for distribution 1,904 1,417
Distribution of Earnings

2023 2022
a) Employees as salaries and wages, bonus, gratuity etc. 476 382
Directors- Salaries and Commission 48 40
b) Shareholders as dividend 420 230
c) Company as retained funds (including depreciation) 404 365
d) Government as taxes (120+316) ( 100+200) 436 300
e) Providers of Capital/Fund as Interest on Debentures
Interest on debentures 30 30
Interest on Fixed loans from IDBI 90 70
120 100
Total distribution of earnings 1,904 1,417
Working of retained earnings :

Earnings Available for Distribution 1904

Employee Cost – 476

Directors Salaries & Commission – 48

Dividend – 420

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 Taxes – 436

Interest – 120 =404

Question 2

The following figures are extracted from the statement prepared by the Cost Accountant and
the Trial Balance of ABC Ltd., which is a single product company

Amount in ₹lakhs

2023 2022 2021

Net Sales 1,745 1,705 1,610
Raw Materials consumed 1,140 1,060 975
Direct Wages 35 32 27
Power and Fuel 30 27 24
Stores and Spares 6 5 4
Depreciation charged to production cost centres 16 15 13
Factory overheads:
Salaries and wages 5 4 3
Depreciation 2 2 2
Rates and Taxes 1 1 1
Other overheads 6 5 4
Administrative overheads:
Salaries and Wages 10 9 8
Rates and Taxes 2 2 2
Other overheads 162 154 148
Selling and distribution overheads:
Salaries and Wages 7 6 5
Packing and Forwarding 6 6 5
Depreciation 1 1 1
Other overheads 124 118 108
Interest 85 74 68
Bonus and Gratuity 12 10 9
Gross Current Assets 840 724 640
Current Liabilities and Provisions 324 305 246
You are required to compute the following ratios as per requirement of Part D, Para 3 & 4
of the Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules,
2014 for 3 years:

(i) Operating Profit as percentage of Value Addition.

(ii) Value Addition as percentage of Net Sales.

(iii) Note: The computation should be based on EBDIT as Operating Profit.

Solution

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 Calculation of operating profit

2023 2022 2021

Net sales (A) 1,745 1,705 1,610
Cost of Sales excluding depreciation & Interest
Raw Material consumed 1,140 1,060 975
Direct Wages 35 32 27
Power and Fuel 30 27 24
Stores and Spares 6 5 4
Factory overheads (excluding depreciation) 12 10 8
Administrative overheads (excluding depreciation) 174 165 158
Selling and distribution overheads (excluding depreciation) 137 130 118
Bonus and Gratuity 12 10 9
Total (B) 1,546 1,439 1,323
Operating Profit (A) - (B) = 199 266 287
Value addition is defined as “the difference between the net output value (Net Sales) and cost of
bought out materials and services for the product under reference”

Calculation of value addition

2023 2022 2021

Net sales 1,745 1,705 1,610
Less : (i) Cost of Bought Out Materials & Service (Raw 1,146 1,065 979
Materials and Stores & Spares)
Power & Fuel, other bought out services 30 27 24
Over heads (excluding Salaries & Wages, Rates & Taxes 298 283 265
and depreciation)
Value Addition : 271 330 342

2023 2022 2021

Operating profit as % of Value Added 199/271 266/330 287/342
73.43% 80.6% 83.92%
Value Addition as % of Net Sales 271/1745 330/1705 342/1610
15.53% 19.35% 21.24%

Question 3

In the Financial Accounts of Chemicals & Fertilizers Ltd. for the year ended March 31, 2023
the profit was ₹8,98,07,500. The profit as per Cost Accounting records for the same period
was less. The following details are extracted from the accounting schedules and Cost Accounting
records of the company.

Financial Accounts ₹000 Cost Accounts ₹000

Opening : Semi Finished Goods 31700 35210
: Finished Goods 83220 78590

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 Closing : Semi Finished Goods 35260 39420
: Finished Goods 89320 80450
Urea & Transport subsidy 348
Expenses on CSR 56
Profit on sale of Fixed Assets 150
Chemical used internally 382 365
Favourable Exch. Rate variation 294
Post-retirement Medical grant 584
Purchase Tax Refund 453
Litigation Recovery-Prior year 125
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Cost
Records for the year ended March 31, 2023.

Solution

Chemicals & Fertilizers Ltd. Amount in ₹thousand

Reconciliation of financial profit and costing profit for the year ended March 31, 2023

Profit or loss as per Financial Accounts 89807.50

A. Less: Incomes not considered in Cost Accounts:
i. Profit on sale of Fixed Assets 150
ii. Urea & Transport Subsidy 348
iii. Litigation Recovery-Prior year 125
iv. Favourable Exch. Rate Variation 294
v. Purchase tax Refund 453
vi. Own consumption (chemicals) valuation difference (382-365) 17 (1387.00)
B. Add: Expenses not considered in Cost Accounts
i. Expenses on CSR 56
ii. Post-retirement medical grant 584 640
C. Less: Difference in Valuation of stock between Financial Accounts
and Cost Accounts
(9660-6070) (workings) (3590.00)
Profit as per Cost Accounts 85470.50
Workings :

Financial Account Cost Accounts

Opening : Semi Finished Goods 31700 35210
: Finished Goods 83220 78590
Total 114920 113800
Closing : Semi Finished Goods 35260 39420
: Finished Goods 89320 80450
Total 124580 119870
Variation in inventory 9660 6070
Increase in Difference of stock valuation towards financial accounts = ₹3590

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 Question 4

The Financial Profit and Loss of M/s. VGM Manufacturing company Ltd. for the year is
₹28,75,000. During the course of cost audit, it is noticed the followings:

(i) Some Old assets sold off which fetched a profit of ₹ 1,25,000
(ii) Interest was received amounting to ₹45,000 from outside the business investment.
(iii) Work-in-progress valuation for financial accounts does not as a practice take into
account factory overhead. Factory overhead is ₹2,15,000 in opening W-I-P and
₹2,45,000 in closing
W-I-P.
(iv) The Company was engaged in Trading activity by purchasing goods of ₹11,15,845 and
selling at ` ₹13,12,850 after incurring ₹35,000 as expenditure.
(v) A major overhaul of machinery was carried out at a cost of ₹ 5,50,000 and next such
overhaul will be done only after five years.
(vi) Opening stock of raw material and finished goods was overvalued for ₹ 2,00,000 and
closing stock was overvalued ₹1,85,000 in financial records.

Work out the profit as per Cost Accounts.

Solution

Reconciliation of Profit between Cost Accounts and Financial Accounts of M/s. VGM Manufacturing
Company Ltd.

Particulars ₹ ₹
Profit as per Financial Account 28,75,000
Add: Difference in valuation of W-I-P 30,000
Proportionate charge i.e. four-fifth for overhaul of machinery 4,40,000
Overvaluation of Opening Stock in the financial records 2,00,000 6,70,000

Less: Profit on sale of old assets not included in Cost A/cs 1,25,000
Interest received from outside investment 45,000
Trading profit not included in cost accounts 1,62,005
Overvaluation of closing stock in the financial records 1,85,000 (-) 5,17,005
Profit as per Cost Accounts 30,27,995

Question 5

a) Ambica Textile Mills produced cloth and fabrics. In addition, they undertook customer’s
job order for processing of cloth towards optimum utilization of its spare capacity and
earned from loan license . From the following Income figures.

Find out the turnover of the company as per the Companies (Cost Records and Audit) Rules:

Income ₹ in Lakhs

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 Sales 19,300
Trading Sales from Depots 1,250
Export Income 2,100
Export Duty 450
Income from Job Processing 1,100
Scrap Sale 235
Income from Loan Licence operations 560

b) The financial profit and loss account for the year 2022-23 of a company shows a net profit
of ₹29,60,000. During the course of Cost Audit, it was noticed that:
(i) The company was engaged in trading activity by purchasing goods at ₹6,00,000 and
selling it for ₹7,50,000 after incurring repacking cost of ₹ 25,000,
(ii) Some discarded assets sold off with no scrap value for ₹ 90,000,
(iii) Some renovation of machinery was carried out at a cost of ₹6,00,000, having a
productive life of five years, but entire amount was charged to financial accounts
(iv) Interest was received amounting to ₹ 1,40,000 from outside investments
(v) Voluntary Retirement payment of ₹3,50,000 was not included in the Cost Accounts,
(vi) Insurance claim of previous year was received to the extent of ₹ 2,50,000 but was
not considered in the Cost Accounts.
(vii) Opening stock or raw materials and finished goods was overvalued by₹ 2,40,000 and
closing stock of finished goods was overvalued by ₹1,10,000 in the financial accounts,
and
(viii) Donation of ₹80,000 towards CSR commitment was not considered in the Cost
Accounts.

Work out the profit as per the Cost Accounts and briefly explain the adjustment, if any,
carried out.

Solution

a) As per the Companies Act, 2013, Turnover means gross turnover made by the company from the
sale or supply of all products and services during a financial year but excluding duties and taxes

Income ₹ in Lakhs
Sales 19,300
Trading Sales from Depots 1,250
Export Income 2,100
Export Duty 450
Income from Job Processing 1,100
Scrap Sale 235
Income from Loan Licence operations 560
Total Turnover 24,545

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b) Profit Reconciliation as per Cost and Financial Records for the year 2022-23

Particulars ₹ in ’000 ₹ in ’000

1 Profit as per Financial Accounts for Audited Products 29,60,000
2 Less : Incomes not considered in the Cost Accounts
a) Trading Profit (7,50,000-6,00,000-25,000) 1,25,000
b) Profit on Sale of Old Assets 90,000
c) Interest received from Outside Investments 1,40,000
d) Insurance claim for previous year received 2,50,000
Total (–) 6,05,000
3 Add : Expenses not considered in the Cost Accounts
a) Donation towards CSR Commitment 80,000
b) VRS Expenses 3,50,000
c) Renovation (4/5th Outlay of 600000) 4,80,000
Total 9,10,000
4 Valuation of stocks (240000-110000)(Overvaluation of 1,30,000
opening stock and closing stock in financial accounts)
5 Other adjustments -
Profit as per the Cost Accounts 33,95,000

Question 6

The following figures are taken from the accounts of Best Ltd. for the year ended
on31.03.2018

Particulars ₹(in lakhs )

Gross Fixed Assets 5,600
Cumulative Depreciation 1,300
Investment in Shares and Debentures 650
Inventories 545
Sundry Debtors 347
Advances for Purchase of Capital Equipment 38
Other Loans and Advances 72
Other Current Assets 37
Sundry Creditors 229
Provision for Expenses 34
Net Sales 4,152
Depreciation 54
Interest 704
Profits before Tax 318
Compute the following under the Companies (Cost Records and Audit) Rules:

(i) Profit as a percentage of capital Employed

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(ii) Profit as a percentage of Net Sales

Solution

Particulars ₹(in lakhs )

Gross Fixed Assets
5,600
-Cumulative Depreciation (1,300)
Net Fixed Assets 4,300
Gross Current Assets:
Inventories 545
Sundry Debtors 347
Other Loans and Advances 72
Other Current Assets 37
Total Current Assets 1,001
Current Liabilities:
Sundry Creditors 229
Provision for Expenses 34
Total Current Liabilities 263
Net Current Assets 738
Total Capital Employed (A+B) 5038
Profit before tax (PBT) 318
Net Sales 4152
Working notes: Capital works in progress, investment outside business and Advance for purchase
of Capital equipment do not enter into the calculation of capital employed.

(i) Profit as percentage of Capita Employed: = (318/5038)×100 = 6.31%

(ii) Profit as percentage of Net Sales: = (318/4152)×100 = 7.66%

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Cost Auditor

Question 1 DEC 2017(16)(8M)

(i) Mr. X, the Cost Auditor of a company, contributes articles in various papers or journals,
discussing matters of professional interest. In the course of such discussion, he mentions
various data which include some vital, but unpublished, data relating to his client company
without its tacit approval. State whether there is punishment, if any, of the Cost Auditor
for such contravention.
(ii) A member of the Institute, whether in practice or not, is liable for disciplinary action if
he/she is found guilty of professional and other misconduct. Explain the term ‘other
misconduct.”

Solution

(i) Clause (1) of Part I of the Second Schedule to the Cost and Works Accountant’s Act 1959 deals
with the professional misconduct relating to the disclosure of information by a CMA in practice
relating to the business of his /her clients to any person other than his/her without the consent
of the client or otherwise than as required by any law for the time being in force would amount
to breach of confidence .The code of ethic further clarifies that such duty continues even after
completion of the assignment. The CMA may, however, disclose the information in case it is
required as a part of performance of his/her professional duties. In the given case

Mr .X has disclosed vital information of his client’s business without the consent of the client
under the impression that it will help the profession and the industry at large it is a professional
misconduct covered by Clause (1) of Part (I) of the Second Schedule of the Cost and Work
Accountant’s Act 1959.

(ii) As per Part IV first schedule to the Institute of Cost and Work Accountant’s Act 1959 a member
of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct
if-

1. He /She is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding 6 months and

2. In the opinion of the Council he/she brings disrepute to the profession or the Institute as
a result of the action whether or not related to his /her professional work.

Question 2 Dec 2022 (16)(8m),June 2018(16)(8m)

Explain whether the following activities amount to Professional Misconduct on the part of a
Cost Accountant;

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(i) Mr. Arun, a CMA, is working as Manager-Cost Accounts of PQR Ltd. He accepts 10% of
profits from his friend, Mr. Raju, a lawyer and a legal consultant for PQR Ltd. He is doing
the job on retainership basis.
(ii) Mr. S, a CMA in Practice, certifies a cost and pricing statement of manufacturing of pipes
for the supply relating to a contract. The statement is prepared by Mr. T, who is not a
CMA or an employee of Mr. S.

Solution

(i) As per provisions of Clause 2 of Part II of The First Schedule of The Cost and Works
Accountants Act, 1959, stipulates the Professional Misconduct in relation to Cost Accountants
in Service. As per the provisions of Part II of the First Schedule of the Act, a Cost Accountant
in Service shall be deemed to be guilty of Professional Misconduct, if he/she "accepts or agrees
to accept any part of fees, profits or gains from a lawyer, a cost accountant or a broker engaged
by such a company, firm or person or agent or customer of such company, firm or person by way
of commission or gratification". In the given case, Mr. Arun, who is working as a Manager—Cost
Accounts of PQR Ltd., accepts 10% of profits from Mr. Raju, who is a legal consultant of the
same company. This amounts to Professional Misconduct.
(ii) As per provisions of Clause 2 of Part I of The Second Schedule of The Cost and Works
Accountants Act, 1959, stipulates, the Professional Misconduct in relation to Cost Accountants
in Practice. As per the provisions of the Part I of the Second Schedule of the Act, a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct, if he/she
"certifies or submits in his/her name, or in the name of his/her firm, a report of an examination
of cost accounting and related statements unless the examination of such statements has been
made by him/her or by a partner or an employee in his/her firm or by another Cost Accountant
in Practice". In the given case, Mr. S. certifies the cost and pricing statement of a company,
which is manufacturing pipes. The statement is to be submitted for a Contract and is not
prepared by him. It is prepared by Mr. T. who is neither a CMA nor an employee of Mr. S. Hence,
this amounts to Professional Misconduct.

Question 3 Dec 2018(16)(4m)

Mr. Arun maya, a practicing Cost Accountant engaged two trainees, under Going training under
his guidance for audit job. Since the job was voluminous, he agreed to pay them, in addition
to stipend, an amount of 10% of the audit fees. Does the action of Mr. Arun maya amount to
professional misconduct ?

Solution

As per Part I of the First Schedule of the Cost and Works Accountants Act, 1959, a Cost Accountant
in practice shall be deemed to be guilty of professional misconduct, if he/she pays or allows or agrees
to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of

29 | P a g e
his/her professional work, to any person other than a member of the Institute or a partner or a
retired partner or the legal representative of a deceased partner. Under such circumstances, any
payment to trainees as a percentage of audit fees is a professional misconduct. He may, if necessary,
pay a lump sum stipend to the trainees.

Question 4 Dec 2023(16)(8m),June 2019(16)(8m)

(i) ABC Ltd. changed its Stock Valuation Policy from FIFO method to Average Cost method in
the FY 2018-19, as a result of which the profit of the Company was inflated by ` 25 lakhs.
The change in policy and the fact of additional gain were not disclosed by the Company nor
the Cost Auditor in the Audit Report. State whether the Cost Auditor is deemed to be
guilty of professional misconduct.
(ii) In the course of performance of his duties, some fraud against the Auditee Company gets
disclosed to the Cost Auditor. What is the punishment to Cost Auditor for failing to report
to the Authority within prescribed time?

Solution

(i) The Part I of the Second Schedule to the Cost and Works Accountants Act,1959 stipulates that
a cost accountant in practice shall be deemed to be guilty of professional misconduct, if he:
a. Fails to disclose a material fact known to him in a cost or pricing statement, which is not
disclosed in a cost or pricing statement, but disclosure of which is necessary in making
such statement, where he is concerned with such statement in a professional capacity;
b. Does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties;
c. Fails to invite attention to any material departure from the generally accepted procedure
of costing and pricing applicable to the circumstances;
In the given case, the Cost Auditor has not disclosed the fact of changing the accounting policy
in the valuation of inventory and the resultant loss in the books of account for the year 2022-
23. Hence, the Cost Auditor is deemed to be guilty of Professional Misconduct.

(ii) According to Section 143(12) of the Companies Act 2013, if an auditor (Cost Auditor is included)
of a company, in the course of the performance of his duties as Auditor, has reason to believe
that an offence involving fraud is being or has been committed against the company by officers
or employees of the company, he shall immediately report the matter to the Central Government
within such time and in such manner as may be prescribed. Sub Section 13 specifies that no duty
to which an auditor of a company may be subject to shall be regarded as having been contravened
by reason of his reporting the matter referred to in subsection (12) if it is done in good faith.
According to Sub-Section 15 if any auditor does not comply with the provisions of sub-section
(12), he shall be punishable with fine which shall not be less than one lakh rupees but which may
extend to twenty-five lakh rupees.

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Question 5 Dec 2019(16)(8m)

(i) A firm of Cost Accountants was appointed by a company to evaluate the costs of the various
products manufactured by it for its information system. One of the partners of the firm was
a Non-Executive Director of the company. Is it permissible?

(ii) A Cost Auditor has reported fraud to the company as required under sec. 143 of the
Companies Act, 2013. What disclosures are to be made by the company in its Board’s Report?

Solution

(i) Clause 4 of Part-I of the Second Schedule to the Cost and Works Accountants Act, 1959 states
that expressing an opinion on cost and pricing of any business or any enterprise in which the
auditor or his firm or a partner in his firm has a substantial interest would constitute misconduct,
unless he discloses the interest also in his report. As per the facts of the case, the firm has
been retained to evaluate the cost of products manufactured by it for its information system.
Therefore, this amounts to Professional misconduct.
(ii) According to Section 143(12) of the Companies Act 2013, if an auditor of a company, in the course
of the performance of his duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of the company,
he shall immediately report the matter to the Board/ Audit Committee/ Central Government
within such time and in such manner as may be prescribed.
As per Rule 13 of the Companies (Audit and Auditors) Rules, 2014, following detailed disclosures
of fraud reported to Audit Committee are to be made in Board’s Report:
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial actions taken.

Question 6 June 2023(16)(8m)

Enumerate the various omissions that might arise in rendering audit services to it's Clients by
a Cost Accountant in practice which can make him guilty of Professional Misconduct as laid down
in Second schedule of CWA Act, 1959

Solution

Part I of the Second Schedule of the CWA Act, 1959 relevant to sec. 21 and 22 lists out the acts
of professional misconduct in relation to Cost Accountants in Practice. Some of such acts are
negligence on the part of the Cost Accountant in Practice to adhere to the fundamental duty to the
client. The specific omissions are mentioned below:

(1) fails to report a material mis-statement known to him to appear in a cost or pricing statement
with which he is concerned in a professional capacity;

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 (2) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties;

(3) fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion;

(4) fails to invite attention to any material departure from the generally accepted procedure of
costing and pricing applicable to the circumstances;

(5) fails to keep moneys of his client other than fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they
are intended within a reasonable time.

Question 7 Dec 2023(16)(8m)

ABC was appointed as Cost Auditor of PQR Ltd for FY 2023-24. After three months of
appointment, for some reasons, the Cost Auditor becomes disqualified to be appointed as Cost
Auditor. State the steps to be taken by the Company as a consequence of such event.

Solution

In the present case, the Auditor has deemed to have vacated his office. For any casual vacancy of
Cost Auditor shall be filled by the Board of Directors within 30 days of occurrence of such vacancy.

The fresh appointment has to follow the same procedure as for appointment of original Auditor,

(a) in the case of companies which are required to constitute an audit committee- the Board shall
appoint an individual, who is a cost accountant in practice, or a firm of cost accountants in practice,
as cost auditor on the recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;(ii) the remuneration recommended by the Audit Committee
under shall be considered and approved by the Board of Directors and ratified subsequently by the
shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the
Board shall appoint cost auditor fixing the remuneration and the remuneration so fixed shall be
ratified by shareholders.

The new Cost Auditor shall submit acceptance letter along with eligibility certificate after receiving
the offer of appointment. Within 30 days of Board meeting in which appointment is made, the
Company shall file a Revised Notice to Central Government through electronic mode, in Form CRA -
2 along with fees as per Rules

Question 8 Dec 2023(22)(7m)

State the procedure of appointment and fixing the remuneration of Cost Auditor

Solution

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Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the procedure of
appointment and fixing the remuneration of a cost auditor.

For the purpose of section 148(3)—

(a) in the case of companies which are required to constitute an audit committee—

(i) the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the Audit committee,
which shall also recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall be considered and
approved by the Board of Directors and ratified subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the
Board shall appoint an individual, who is a cost accountant in practice or a firm of cost accountants
in practice as cost auditor and the remuneration of such cost auditor shall be ratified by
shareholders subsequently.

Question 9 June 2024(22)(7m)

Can a Cost Accountant be appointed

(i) as a Key Managerial Person; or

(ii) as an Independent Director, as per the provisions of the Companies Act, 2013.Explain

Solution

Cost Accountant as a Key Managerial Person:

Section 203 provides for the appointment of Key Managerial Person

• Managing Director or Chief Executive Officer or manager and in their absence, a whole time
director;
• Company Secretary; and
• Chief Financial Officer

By virtue of qualification and experience, a Cost Accountant can become Key Managerial Person in
the Company.

Cost Accountant as an Independent Director:

Section 149(4) provides that every listed public company shall have at least one third of the total
number of directors as independent directors.

Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes the
qualification of an independent director who shall possess appropriate skills, experience and
knowledge in one or more field of finance, law, management, sales, marketing, administration,

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research, Corporate Governance, technical operations or other disciplines related to the company
business.

The Cost Accountant having expertise in most of the above fields can become independent director
as stipulated in the Companies Act, 2013.

Question 10 June 2023(22)(6m)

Write a short note on Code of Professional Ethics which need to be followed in the field of
Cost and Management Accounting.

Cost Accountants are bound by certain Professional ethics and requested to observe some
fundamental principles that will have to be followed by a Cost Accountant

Solution

The Code of Professional Ethics for Cost and Management Accountants highlights the ethical
responsibilities and standards that professionals in this field must uphold. These ethical standards
are critical to maintaining trust, credibility, and professional reputation. Below is a breakdown of
the key components:

Objectives of the Accountancy Profession

The profession strives to achieve:

1. Credibility: Ensuring trust in information and information systems.

2. Professionalism: Gaining recognition from employers, clients, and others as trusted

professionals.

3. Quality of Service: Providing high standards of performance.

4. Confidence in Ethics: Establishing trust through a framework of ethical standards governing

the provision of services.

Fundamental Principles

To meet these objectives, cost accountants must adhere to the following principles:

1. Integrity:
Be straightforward, honest, and truthful in all professional services.

2. Objectivity:
Ensure fairness and impartiality, avoiding prejudice, bias, or undue influence from others.

3. Competence:
Provide services only when competent to do so. If needed, seek advice and assistance to
ensure quality and satisfaction.

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 4. Confidentiality:
Respect confidentiality and not disclose any information obtained in the course of
professional work, unless legally or professionally required.

5. Professional Behaviour: Act in a manner that maintains and enhances the reputation of the
profession.

Question 11 June 2017(16)(8m)

Mr. P. Swamy, the Cost Auditor of PQR Ltd. for the FY 2016-17, was offered an assignment
of Investment Consultant of RST Ltd., a subsidiary of PQR Ltd., for the same year.

i. Whether the acceptance of the assignment amounts to violation of law and professional
misconduct?
ii. What are the penal provisions, if any? (Mention the relevant provisions.)

Solution

i. Any person who is engaged in consulting and providing specialized services to a company and
its subsidiary companies is not eligible to act as Cost Auditor [Section 141 of the Companies
Act, 2013, read with Companies (Audit and Auditors) Rules, 2014]. The Cost Auditor cannot
accept the assignment as long as he/she remains appointed as the Cost Auditor of the
company. A member of the institute, whether in practice or not, shall be deemed to be guilty
of other misconduct, if— (1) he is held guilty by any civil or criminal court for an offence
which is punishable with imprisonment for a term not exceeding six months; (2) in the opinion
of the Council he brings disrepute to the profession or the institute as a result of his action
whether or not related to his professional work.[Part IV, The First Schedule] A member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct,
if he is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term exceeding six months.[Part III, The Second Schedule]
ii. If an auditor has contravened the provisions of the Companies Act, 2013, he/she shall be
punishable with fine which shall not be less than twenty five thousand rupees but which may
extend up to five lakh rupees. When the auditor has contravened knowingly or will fully with
the intention to deceive the company or its shareholders or creditors or tax authorities,
he/she shall be punishable with imprisonment for a term which may extend to one year and
with fine, which shall not be less than one lakh rupees but which may extend up to twenty-
five lakh rupees. When the auditor has been convicted as above, he/she shall be liable to
refund the remuneration received and pay for the damages to the company, statutory body
or to any other person for the loss arising out of incorrect statement made in his/her report
[Section 147 of the Act]. A member of the Institute, whether in practice or not, shall be
deemed to by guilty of other misconduct, if he/she is held guilty by any civil or criminal court
for an offence which is punishable with imprisonment for a term exceeding six months [The
Second Schedule, Part III of the Cost and Works Accountants Act, 1959].

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 OVERVIEW OF COST ACCOUNTING STANDARDS AND GACAP

CAS 2 – Capacity Determination

Question 1

A plant operates 3 shifts of 8 hours each for all days except Sundays and 8 holidays.

Preventive maintenance is taken care in Sundays and annual maintenance in 8 holidays.

Normal idle time for food, shift change and other work for the workers is 1 hour per shift.

Installed Capacity of the machine = 1200 units per hour.

Production during last 5 years & Current year are 69.4, 72.6, 71.4, 70.5, 70.8, 69.9 lakh
units

Determine according to CAS 2, Installed capacity, Actual capacity, Idle capacity, Abnormal
idle capacity

Solution

i. Installed capacity = days in year × working hours per day × unit per hour

= 365 × 8 × 3 × 1200 unit = 105.12 lakh units

ii. Available capacity = days available × available hour per shift × shifts × units per hour

= (365 – 52 – 8) × (8 – 1) × 3 × 1200 = 76.86 lakh units

iii. Normal capacity = 69.4 + 72.6 + 71.4 + 70.5 + 70.8 /5 = 70.94 Lakhs units
iv. Actual capacity = Current production / Installed capacity = 69.9 / 105.12 = 66.50 %
v. Idle capacity = Installed capacity – Actual capacity = 105.12 – 69.90 = (35.22/105.12) × 100 =
33.50%
vi. Abnormal Idle capacity = Normal capacity – Actual capacity

= 76.86 – 69.9 = 6.96 lakh units

Question 2

Burnet Ltd., a manufacturing unit, provides the following extracts from its records for the
year ended March 31,

2023

The Company’s specifications capacity for a machine per hour 1,500 units
No. of shifts (each shift of 8 hours) per day 3 shifts
Paid Holidays in a year (365 days):

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 Sunday 52 days
Other holidays 12 days
Annual maintenance is done within these holidays
Preventive weekly maintenance for the machine is carried on during Sundays
Normal idle capacity due to lunchtime, shift changes etc. per shift 1 hour
Production based on sales expectancy in past 5 years (units in lakh): 75.70 ,87.42
,65.38 77.97
,76.08 ,
Actual Production for the year (units in lakh) 81.50

You are required to calculate:

(i) Installed Capacity

(ii) Practical Capacity

(iii) Actual Capacity (%)

(iv) Normal Capacity

(v) Idle Capacity (%)

(vi) Abnormal Capacity . Keeping in view of the relevant Cost Accounting Standard (CAS-2)

Solution

Calculation of different capacities

Burnett Ltd.

i. Installed Capacity: days in year × working hours per day × unit per hour

365 × 8 × 3 × 1500 = 131.40 lakh units

ii. Practical capacity: days available × available hour per shift × shifts × units per hour

(365-52-12) × ( 8-1) × 3 × 1500 = 94.815 lakh units

iii. Actual capacity Utilization: Current production / Installed capacity

(81.50 / 131.40) × 100 = 62.02%

iv. Normal capacity: (75.70+87.42+65.38+77.97+76.08) / 5 = 76.51 lakh units

v. Idle Capacity: Installed capacity – Actual capacity

(131.40-81.50) = 49.90 / 131.40 = 0.3798 = 37.98%

vi. Abnormal Idle capacity: (94.815 – 81.50) = 13.315 lakh units

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Question 3

GLORY LTD., a manufacturing company provides the following extracts from its Cost Accounting
Records for the year ended March 31, 2023:

The total capacity for 5 Machines per hour as per the company’s 2500 Units
specification
No. of shifts (each shift of 8 hours) per day 3
Paid holidays in a year (365 days):
Weekly holidays 52
Other holidays 10
Annual maintenance is done within these holidays (i.e. 10)
Preventive maintenance for the machines is carried on during weekly off
day
Normal idle capacity due to lunchtime, shift changes etc. per shift 0.5 hour
Production based on sales expectancy in past 3 years (units in lakh): 154.50
159.54
166.66
Actual production for the year ended March 31, 2023: 158.80
You are required to calculate: (1) Installed Capacity (2) Practical Capacity (3) Actual Capacity
(%) (4) Normal Capacity (5) Idle Capacity (%) (6) Abnormal Capacity — Keeping in view of the
relevant Cost Accounting Standard (CAS-2).

Solution

GLORY LTD.

CALCULATION OF DIFFERENT CAPACITIES FOR THE COMPANY

(1) Installed Capacity : 365 × 8 × 3 × 2500 = 21900000 i.e. 219 lakh units

(2) Practical capacity: (365 – 52 – 10) × (8 – 0.5) × 3 × 2500 = 17043750 i.e. 170.4375 lakh units

(3) Actual capacity (given) = 158.80 lakhs units

Actual capacity utilization: (158.80/219) × 100 = 72.51%

(4) Normal Capacity: (154.50 + 159.54 + 166.66)/3 = 160.23 lakh units

(5) Idle capacity: (219 – 158.80) = 60.20 lakh unit i.e. (60.20/219) = 27.49%

(6) Abnormal Idle capacity: (170.4375 – 158.80) = 11.6375 lakh units i.e. (11.6375/170.4375) = 6.83%.

Question 4 June 2018(16)(6m)

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The following data have been available of Sun flag Dolon Limited:

2020 - 21 2021 - 22 2022 – 23

Installed Capacity—Ton 250 250 250
Production—Ton 240 230 125
Cost Per Ton ₹ 1,000 1,077 1,660
The poor capacity utilization in 2022-23 was due to abnormal power-cut. The escalation in
costs were 5% in

2021-22 and 7% in 2022-23 based on 2020-21

(i) Calculate the abnormal cost due to power cut.

(ii) How would you treat these abnormal cost?

Solution

2020-21 2021-22 2022-23

Installed Capacity – Ton 250 250 250
Production—Ton 240 230 125
% of Capacity Utilisation 96 92 50
Cost Per Ton ₹ 1,000 1,077 1,660
Escalation factor 100 105 107
Cost at base year price 1,000 1077*100/105 1660*100/107
1,026 1,551
Total cost of production ₹ 2,40,000 2,35,980 1,93,875
Variable Cost/Ton ₹ 402 402 401
Fixed Cost/Ton 598 624 1,150
Fixed Cost @ 100% utilisation ₹ 574
Hence, increase in Fixed Cost/Ton due to poor capacity utilization in 2022-23

= (1,150 –574) = ₹ 576

i. Total abnormal cost due to power cut = 576 × 125 = ₹ 72,000

ii. The abnormal cost must be excluded from computation of cost and has to be shown under
Para 7 of the Cost Audit Report as “Abnormal Non-Recurring Cost”.
iii. The 50% Under Utilization of capacity being due to power-cut only, the Company should
consider possibility of captive generation, if the power-cut is likely to persist. Accordingly,
the investment needed, potential savings, etc. must be computed to determine the viability
of such a decision.

Working Notes:

2021-22 2022-23

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 Difference in Total Cost [2,40,000 – [2,35,980 – 1,93,875]
2,35,980] = 4,020 = 42,105
Difference in production 10 105
Variable Cost 402 401

Question 5

The following information pertains to REACON CEMENT LTD., a manufacturing cement company
for the year

that ended as follows:

The year ended March 31 2022-23 2021-22

Rated Capacity per Hr (in MT) 80 80
Break down (Hrs) 2,177 1,015
Planned Maintenance (Hrs) 247 422
Power restrictions (Hrs) 1,237 1,481
Shortfall (there are no orders) (Hrs) 792 677
Want of wagons (Hrs) 495 635
Total stoppage (Hrs) 4,948 4,230
Total running (Hrs) 3,888 4,582
Total available Hours 8,836 8,812
Production during the year (in MT) 2,48,844 3,29,928
Hourly Rate of Production (in MT) 64 72
Capacity Utilization (%) 62.21 82.48
Annual Installed Capacity (in MT) 4,00,000 4,00,000
Based on information stated above, you as a Cost Auditor are required to offer your comments
on:

(i) The performance of the company

(ii) Your suggestion for improvement.

Solution

Recon Cement Ltd.

Performance analysis

i.
a) Rated capacity = 80 MT/Hr. : Rated capacity achieved in 2021-22 = (72/80)×100 = 90%
Rated capacity achieved in 2022-23 = (64 /80) × 100 = 80%. The capacity achievement as %
of rated capacity has declined from 90% to 80% in 2021-22.

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 Further the Capacity Utilization has gone down to 62.21% in 2022-23 from 82.48% of
previous year; a reduction of 20.27%.
b) From the data available the following observations are noted:-
1. Breakdown hours have gone up from 1,015 hours to 2,177 hrs.’, an increase by 114.48%
2. Planned Maintenance hrs has reduced from 422 hrs.’ to 247 hrs.’ i.e. by 41.47%
3. Shortfall hrs due to lack of orders has increased from 677 hrs.’ to 792 hrs.’ i.e. by 16.99%
4. The total stoppage hrs. has increased from 4,230 hrs to 4,948 hrs i.e. by 16.97%
5. The total running hrs has come down from 4,582 hrs to 3,888 hrs i.e. by 15.15%
6. The production has come down from 3,29,928 MT to 2,48,844 MT i.e. by 24.58% From the
above findings, it can be pointed out that the under utilization of capacity to the extent of
little over 20% can be attributed mainly to:-
• Increased total stoppage hours of 4,948 of 2022-23 as against that of 4,230 hrs in
2021-22 and
• The net increase of 718 hrs (4,948-4,230) is again due to increase of break down by
1,162 hrs
(2,177-1,015) in the year 2022-23
ii. Suggestion:
Therefore, the Company should look into the aspect of proper maintenance, securing sufficient
orders to avoid lost time. Better utilization of capacity can be also be achieved by improving
availability of wagons. The company may also carry out a cost-benefit analysis to have captive
source of power.

CAS 4 Cost of Production / Acquisition / Supply of Goods / Provision of Services

Question 6 Dec 2017(16),June 2024 (22)(7m)

The following particulars pertaining to production of yarn are extracted from the records of
Balarampur Textiles Ltd. for the year ended March 31, 2017:

Particulars ₹ ‘000

Direct Material Cost per unit inclusive of Excise Duty ₹ 280 thousand 2,560

Direct Wages & Salaries 1,540

Direct Expenses 450

Indirect Materials 533

Factory Overheads 897

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Administrative Overheads (40% relating to Production activities) 1,250

Quality Control Cost 565

Research and Development Cost 600

Interest on Working Capital 350

Sale of Scrap Realized 460

You are to determine the cost of production for the purpose of captive consumption in

terms of the Rule 8 of the Central Excise Valuation (DPE) Rules 2000 and as per the CAS-4
and the Assessable Value for the purpose of paying Excise Duty on captive consumption.

Solution

According to the Central Excise Valuation (Determination of price of Excisable Goods) Rules 2000,
the assessable Value of goods used for captive consumption is 110% (w.e.f 5-8-2003) of cost of
production of such goods. The manner of determination of cost of production for captive
consumption is laid down in CAS 4.

Particulars ₹ in ‘000

Direct Material 2560

Direct wages and salaries 1540

Direct expenses 450

Indirect Materials 533

Factory Overheads 897

Administrative Overheads(40% on ₹.1250) 500

Quality Control Cost 565

R& D Cost 600

Total cost 7645

Less: realization of scrap 460

Cost of production as per CAS 4 7185

Note : 1. The cost of Working Capital Interest is not chargeable to Cost of Production

2. Assessable value as per Excise Rules is ₹ 7903500 (110 % × 71,85,000)

Question 7

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ABUNA ELECTRONICS LTD. is engaged in the manufacture of LED TV sets having its factories
at Patna and Gujarat. The company manufactures picture tube at Patna which is consumed to
produce LED TV sets at Gujarat factory. The following information pertaining to captively
consumed picture tubes are extracted from the records of the company for the half year
ended March 31, 2023.

Direct material 950

Direct wages and salaries 357
Direct expenses 80
Indirect materials 70
Factory overheads 320
Administrative overheads (20% relating to production activities) 640
Quality control cost 100
Research and development cost 125
Selling and distribution expenses 225
Sale of scrap realized 130
Profit margin 15%
You are required to determine:

(i) The cost of production for purpose of captive consumption in terms of Rule 30 of the Central
Goods & Services Tax Rules 2017 and as per CAS-4 (Revised), and

(ii) Assessable Value for the purpose of paying GST on applicable transactions.

Solution

ABUNA ELECTRONIC LTD.

Computation of Cost of Production (As per CAS-4)

Direct material 950

Direct wages and salaries 357
Direct expenses 80
Factory overheads 320
Indirect materials 70
Quality control cost 100
Research and development cost 125
Administrative overheads 128
LESS : Sale of scrap realized (130)
Cost of production 2000
Add: 10% as per Rule 30 of CGST Rules, 2017 (10% of ` 2,000) 200
Assessable Value as per Rule 30 of CGST Rules, 2017 2200

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Question 8 Dec 2019(16)(4m)

How the cost of production of goods and provision of services as per CAS-4 read

with CGST Rules are determined:

i. where the supply of goods or services is for a consideration not wholly in money.
ii. where goods are intended for further supply as such by the recipient?

Solution

Cost Accounting Standard 4 (CAS 4) specifies the principles for determination of cost of production
for valuation of goods based on cost. Where the supplier and the recipient are not related and price
is the sole consideration, the value of supply or services shall be transaction value. CGST Act and
Rules 27, 28, 29 of CGST Rules provide methodologies for determination of value of supply under
certain exceptional situations. (1) Where the supply of goods or services is for a consideration not
wholly in money, the value shall be the (a) open market value or (b) the value of supply of goods or
services or both of like kind and quality for distinct or related person. (2) Where goods are intended
for further supply as such by the recipient, the value shall be an amount equivalent to 90% of the
price charged for the supply of goods of like kind and quality to his customer not being a related
person. If the value is not determinable, it will be 110% of cost.

Question 9 Dec 2022 (16)(4m)

To determine Cost Production for Captive Consumption what are different cost components
considered

Solution

Institute of Cost Accountants of India (ICAI) has issued Cost Accounting Standard CAS-4 titled
‘Cost of Production for Captive Consumption’. The standard has clarified that in case of captive
consumption, cost calculation should be as per CAS-4 standard only. Cost of production of a product
consists of materials consumed, Direct Wages and Salaries, direct expenses, works overheads,
quality control costs, research development costs, packing costs, administrative overheads relating
to production. To arrive at cost of production of goods dispatched for captive consumption,
adjustment for stock of Work-in-progress, finished goods, recoveries for sales of scrap, wastages
etc. shall be made.

Question 10 Dec2022(16)(4m)

How Capacity is determined according to cost Accounting standards

Solution

Determination of Capacity:

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1. Capacity shall be determined in terms of units of production or services or equivalent machine or
man hours.

2. Installed Capacity: Installed capacity is usually determined based on:

(i) Technical specifications of facility.

(ii) Technical evaluation

(iii) Capacities of individual or interrelated production or operation Centres.

(iv) Operational constraints or capacity of critical machines or equipment

(v) Number of shifts or machine hours or man hours.

In case, technical specifications of facility are not available, the estimates by technical experts on
capacity under ideal conditions shall be considered for determination of installed capacity. In case
the installed capacity is assessed as per direction of the Government or regulator it shall be in
accordance with the said directives.

3. Reassessment of Installed Capacity:

Installed capacity shall be reassessed in case of any change due to addition, deletion, modification
or for any other reason from the date of such change. In case the installed capacity is reassessed
as per direction of the Government or regulator it shall be in accordance with the said directives.

4. Normal Capacity:

Normal capacity is determined after suitable adjustments to the Installed Capacity The adjustments
may be of the following nature:

(i) Time lost due to scheduled preventive or planned maintenance

(ii) Number of shifts or machine hours or man hours

(iii) Holidays, normal shut down days, normal idle time

(iv) Normal time lost in batch change over

CAS -5 Determination of Average (Equalized) Cost of Transportation

Question 11 Dec 2017(16)(4m)

How to treat Inward Transportation Cost as per the Cost Accounting Standard 5? How
Transportation Cost is to be determined in case the manufacturer is having its own transport
fleet?

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Solution

As per the Cost Accounting Standard 5, Inward transportation cost is the transportation expenses
incurred in connection with the materials/goods received at factory or place of use. Inward
transportation costs shall form the part of the cost of procurement of materials which are to be
identified for proper allocation/apportionment to the materials/ products.

In case of a manufacturer having his own transport fleet, proper records shall be maintained to
determine the actual operating cost of vehicles, showing the details of various elements of cost,
such as salaries and wages of driver, cleaners and others, cost of fuel, lubricant, grease, amortized
cost of tyres and battery, repairs and maintenance, depreciation of vehicles, distance covered and
trips made, goods hauled transported to the depot.

Separate records should be maintained as per Appendix 1 to the standard separately for

(i) Inward transportation

(ii) Outward transportation

(iii) Movement for home consumption and export

(iv) Separate for production and trading activities

Separate for transportation other than by road, viz, by air, etc.

Question 12 Dec 2019(16)(8m) ,Dec 2023(16)(6m)

(i) What are the advantages of Cost Accounting Standards?

(ii) Answer the following with reference to Transportation Cost as per Cost Accounting
Standard-5 (CAS-5):

I. What items of cost shall not be included in Transportation Cost?

II. For apportionment of outward Transportation Cost, what basis should be adopted?

Solution

i. Cost Accounting Standards are set of standards that are designed to achieve ‘uniformity and
consistency in cost accounting practices.’ The Institute of Cost Accountants of India,
recognizing the need for structured approach to t he measurement of cost in manufacture or
service sector and to provide guidance to the user organizations , government bodies,
regulators, research agencies and academic institutions to achieve uniformity and consistency
in classification, measurement and assignment of cost to product and services, has
constituted Cost Accounting Standards Board (CAS B) with the objective of formulating the
Cost Accounting Standards. The advantages of Cost Accounting Standards are as follows:

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 a. Providing a structured approach to measurement of costs in manufacturing process or service
industry;

b. Integrating, harmonizing, and standardizing cost accounting principles and practices;

c. Providing guidance to users to achieve uniformity and consistency in classification,

measurement, assignment, and allocation of costs to products and services;

d. Arriving at the basis of computing the cost of product, activity, or service where required by
legal or regulatory bodies;

e. Enabling practicing members to make use of Cost Accounting Standards in the attestation of
General Purpose Cost statements; and

f. Assisting in clear and uniform understanding of all the related issues by various user
organizations, government bodies, regulators, research agencies, and academic institutions.

ii. Cost Accounting Standard 5 (CAS -5) on “Determination of Average (Equalized) Cost of
Transportation” deals with the determination of average transportation cost of a product.

(a) Cost of Transportation comprises of the cost of freight, cartage, transit insurance and cost
of operating fleet and other incidental charges whether incurred internally or paid

to an outside agency for transportation of goods. Penalty, detention charges, demurrage and cost
related to break down and expenses abnormal and non-recurring in nature will not be included in
transportation cost.

(b) The following basis may be used, in order of priority, for apportionment of outward
transportation cost depending upon the nature of products, unit of measurement followed and
type of transport used:

(i) Weight

(ii) Volume of goods

(iii) Tone -Km

(iv) Unit / Equivalent unit

(v) Value of goods

(vi) Percentage of usage of space

Once a basis of apportionment is adopted, the same should be followed consistently

Question 13 Dec 2022(16)(8m)

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As per Cost Accounting Standard on Determination of Average (Equalized) cost of
Transportation (CAS-5), what are the records to be maintained for ascertaining the
Transpiration Cost?

Solution

Maintenance of records for ascertaining Transportation Cost:

(i) Proper records shall be maintained for recording the actual cost of transportation
showing each element of cost such as freight, cartage, transit insurance and others after
adjustment for recovery of transportation cost. Abnormal costs relating to
transportation, if any, are to be identified and recorded for exclusion of computation of
average transportation cost.

(ii) In case of a manufacturer having his own transport fleet, proper records shall be
maintained to determine the actual operating cost of vehicles showing details of various
elements of cost, such as salaries and wages of driver, cleaners and others, cost of fuel,
lubricant grease, amortized cost of tires and battery, repairs and maintenance,
depreciation of the vehicles, distance covered and trips made, goods hauled and
transported to the dept.

(iii) In case of hired transport charges incurred for dispatch of goods, complete details shall
be recorded as to date of dispatch , type of transport used, description of the goods,
destination of buyer, name of consignee, challan number, quantity of goods in terms of
weight or volume, distance involved, amount paid etc.

(iv) Records shall be maintained separately for Inward and outward transportation cost
specifying the details particulars of goods dispatched , name of supplier/recipient,
amount of freight etc.

(v) Separate records shall be maintained for identification of transportation cost towards
inward movement of material (procurement) and transportation cost of outward
movement of goods removed/sold for both home consumption and export.

(vi) Records for transportation cost from factory to depot and thereafter shall be
maintained separately.

(vii) Records for transportation cost for carrying any material/product to job-workers
place and back should be maintained separately so as to include the same in the
transaction value of the product.

(viii) Records for transportation cost for goods involved exclusively for trading activities
shall be maintained separately and the same will not be included for claiming any
deduction for calculating assessable value excisable goods cleared for home consumption.

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 (ix) Records of transportation cost directly allocable to a particular category of products
should be maintained separately.

(x) For common transportation cost, both, for own fleet or hired ones, proper records for
basis of apportionment should be maintained.

(xi) Records for transportation cost for exempted goods, excisable goods cleared for export
shall be maintained separately.

Separate records of cost for mode of transportation other than road like ship, air etc., are to be
maintained, which will be included in total cost of transportation

CAS 6 Material cost

Question 14 :

Purchase of Materials $ 50,000 [Forward contract rate $ = `64.40 but $ = ₹64.60 on the
date of importation]; Import Duty paid ₹5,65,000; Freight inward ₹1,62,000; Insurance paid
for import by road ₹48,000; Cash discount ₹33,000; Payment made to the foreign vendor after
a month, on that date the rate of exchange was $ = `65.20. Compute the landed cost of
material.

Solution

Computation of Landed Cost of Material

Particulars Amount ₹
Purchase price of Material [50,000 × 64.60] 32,30,000
Add : Import duties of purchasing the material 5,65,000
Add : Freight Inward during the procurement of material 1,62,000
Add: Insurance paid 48,000
Value of Receipt of Material 40,05,000
(i) Excess payment made to the vendor due to exchange fluctuation is not an includible cost, hence
not considered.

(ii) Though the forward contract rate was $ = ₹64.40, but the exchange rate on the date of
importation is considered. Hence, included in the cost of materials. Accordingly, the purchase cost
is computed considering the $ = ₹64.60

Question 15 :

Purchase of Materials ₹3,00,000 (inclusive of GST of ₹15,715); Free on Board ₹12,000;

Import Duty paid ₹15,000; Freight inward ₹20,000; Insurance paid for import by sea ₹10,000;

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Rebates allowed ₹4,000; Cash discount ₹3,000; Subsidy received from the Government for
importation of these materials ₹20,000. Compute the landed cost of material (i.e. value of
receipt of material).

Solution

Computation of Material Cost Sheet

Particulars Amount ₹
Purchase price of Material 3,00,000
Add: Free on Board 12,000
Add: Import Duties of purchasing the material 15,000
Add: Freight Inward during the procurement of material 20,000
Add: Insurance paid 10,000
total 3,57,000
Less : Rebate 4,000
Less: GST Input Tax Credit 15,715
Less: Subsidy received from the Government for importation of materials 20,000
Value of Materials 3,17,285
Note: (i) Cash discount is not allowed, as it is a financial item.

(ii) Subsidy received, rebates and GST Input Tax Credit are to be deducted for the purpose of
computing the material cost.

Question 16 Dec 2017

From the following figures of Systematics Polytex Ltd., compute the landed cost of Egyptian
Cotton for the year 2016-2017:

Particulars Amount

Materials $35,000

Import Duty ₹ 3,35,000

Freight Inward ₹ 1,62,000

Insurance of Import by sea ₹ 48,000

Cash Discount ₹ 33,000

Bank Interest for Import Credit ₹ 15,000

CENVAT Credit refundable ₹ 37,000

Weight Reduction due to Moisture Loss 0.6%

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Parity value of US $ :

On the date of Contract ₹ 64.40

On the date of Import ₹ 64.60

On the date of Payment ₹ 65.20

Solution

Landed Cost of Material ₹

Materials Cost (35,000 × 64.40) 22,54,000

Import Duty 3,35,000

Freight Inwards 1,62,000

Insurance by Sea 48,000

Total 27,99,000

Less: Cen vat Credit 37,000

Landed cost of Materials 27,29,000

Unit cost increased by 100/99.4 times (due to weight loss)

Note : 1. Exchange Loss, finance costs are not allowable for inclusion in the Material Cost

2. Weight Loss does not affect the total cost, but the unit cost is enhanced by the percentage of
weight loss.

Cash discount is not allowed, as it is a financial item.

Question 17

How do you assign cost of Indirect Materials?

Solution

(i) 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.

(ii) 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.

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The cost of indirect material with life exceeding one year shall be included in cost over the useful
life of the material

CAS 7 Employee cost

Question 18 Dec-2017 (Syl-2016)

I. How would you treat the following as per the CAS 7 related to Employee Cost?

i. Separation Cost due to voluntary retirement, retrenchment termination, etc.

ii. Idle Time Cost

II. Find the Employee Cost of a company for the year 2016-17 as per the CAS 7 from the
following figures:

Particulars (₹ lakh)

Salaries, wages, allowances and bonus 950

Wage award arrears for the previous year 85

Contribution to provident and other funds 188

Employee welfare 56

Abnormal Idle Labor cost due to strike 95

Wages of contractual labor 125

VRS payment for the year 66

Solution

Separation costs related to voluntary retirement, retrenchment, termination etc., shall be amortized
over the period benefiting from such costs. The amortized separation costs for the period shall be
treated as indirect cost and assigned to the cost objects in an appropriate manner. However un
amortized amount related to discontinued operations, shall not be treated as Employee Cost but
should be charged to Profit and Loss account.

Idle Time Cost shall be assigned direct to the cost object or treated as overheads depending on the
economic feasibility and the specific circumstances causing such idle time. Cost of Idle time for
reasons anticipated like normal lunchtime, holidays etc. is normally loaded in the employee cost while

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arriving at the cost per hour of an employee/a group of employees whose time is attributed direct
to the cost objects.

I. The employee cost for the company for the year 2016-17 is as follows:

(₹ Lakh)

Salaries, Wages, allowances and bonus 950

Wages of contractual labor 125

Contribution to provident fund and other funds 188

Employee Welfare 56

VRS payment for the year 66

Total 1385

Note : 1. As per CAS 7, arrear not related to the current year should not be included in

the Employee Cost.

2. Abnormal idle time cost is charged to Costing Profit & Loss Account

3. It is assumed that the VRS payment does not relate to closure of any section or activity
of the unit.

Question 19 Dec 2018

What items of expenses are to be included as Employee Cost as per the revised CAS 7 guidelines
?

Solution

The revised CAS 7 Guidelines lay down that the following items of expenses are to be included in
Employee Cost (for all employees whether temporary, part-time or contractual)

Employee Cost (payable in cash or kind excluding prior period costs)

• Salaries, wages, allowances, bonus/incentive

• Contribution to provident and other funds Employee welfare & other benefits

Employee Cost (future benefits)

• Gratuity

• Leave encashment

• Other retirement/separation benefits

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 • VRS/other deferred employee cost & other future benefits

Benefits generally include

• Paid holidays

• Leave with pay

• Statutory provisions for insurance against accident or health scheme

• Statutory provisions for workman’s compensation

• Medical benefits to the employees and dependents.

• Free or subsidized food

• Free or subsidized housing

• Free or subsidized education to children

• Free or subsidized canteen, crèches and recreational facilities

• Free or subsidized conveyance

• Leave travel concession

• Interest-free or subsidized loans

• Any other free or subsidized facility

• Cost of employees’ stock option

Question 20

A steel company which produces iron casting pipes and rod iron is covered under the cost audit
according to the companies (cost records and audit) rules 2014. From the expenditure data
relating to 2020-21, determine the employees cost according to CAS-7.

SI. No. Particulars Rs in lakh₹

(i) Salary, wages and other allowances 865

(ii) Bonus 95

(iii) Contribution to provident fund 90

(iv) Wages to contractual Labour 108

(v) Employees welfare 49

(vi) Abnormal cost due to strike 105

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 (vii) VRS payment for closure of rod iron section of the plant (to be 105
amortized for five years from the current period).

(viii) Arrear salary (2019 -20) 240

(ix) Compensation paid against the past periods against court order 85

Solution

The Employee Cost as per CAS 7 for the period FY 2020-21 = Rs. 1,228 lakh₹

CAS 8 Cost of Utilities

Question 21 Dec 2018

A chemical unit generates in-house power to meet its shortfall from grid supply. It has 20%
surplus power which it can supply to the adjacent units. From the cost data given below, how
would you compute the cost of power as per CAS 8 is the following circumstances ?

(i) Power generated for the purpose of inter-unit transfers.

(ii) Power generated for the inter-company transfers

Power generated 29,76,500 Kwh

Particulars Total Amount (Rs.) (Rs.)/’00 kwh

Coal Consumed less Ash Sale 15,80,000 53.08

Diesel Oil 1,85,000 6.22

Water 16,40,000 55.10

Stores 65,000 2.18

Salaries of Power House Staff 13,94,800 46.86

Repairs & Maintenance 2,96,000 9.94

Deprecation of Plant and Boiler 2,06,000 6.92

Share of Administration 2,05,000 6.89

Overheads

Interest on Asset Purchase 1,40,000 4.70

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Distribution Cost 1,80,000 6.05

Total Power House Cost 58,91,800 197.94

Solution

(i) Cost of power generated for the purpose of inter-unit transfers shall comprise direct
material cost, direct employee cost, direct expenses, factory overheads and distribution
cost. Interest on asset purchase and share of administration over heads will not form
part of the cost. This is calculated as below :

Particulars Total Amount (Rs.)

Coal Consumed less Ash Sale 15,80,000

Diesel Oil 1,85,000

Water 16,40,000

Stores 65,000

Salaries of Power House Staff 13,94,800

Repairs & Maintenance 2,96,000

Depreciation of Plant, Boiler 2,06,000

Distribution Cost 1,80,000

Total 55,46,800

Therefore, cost of power generated for the purpose of inter-unit transfers

= 55,46,800 / 29765 = Rs. 186.35 per 100 Kwh

(ii) Cost of power generated for the inter-company transfers shall comprise direct material
cost, direct employee cost, direct expenses, factory overheads, distribution cost and
share of administrative overheads. Interest on asset purchase will not form part of the
cost. This is calculated as below.

Particulars Total Amount (Rs.)

Coal Consumed less Ash Sale 15,80,000

Diesel Oil 1,85,000

Water 16,40,000

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 Stores 65,000

Salaries of Power House Staff 13,94,800

Repairs & Maintenance 2,96,000

Depreciation of Plant, Boiler 2,06,000

Share of Administration Overheads 2,05,000

Distribution Cost 1,80,000

Total 57,51,800

Therefore, cost of power generated for the purpose of inter-company transfers

= 57,51,800 / 29765 = Rs. 193.24 per 100 kwh

Question 22

A manufacturing firm has up its own power plant to cater its need in manufacturing process.

Its one month data is given below :

Number of units produced = 100 lakh units of which 5% is used by generating unit.

Material and utility used :

(i) Coal 300 MT @ ₹ 30,000 per MT

(ii) Oil 5 MT @ ₹1,60,000 MT

(iii) Cost of Water extraction and treatment : 6 lakh litres @ ₹3 per litre

(iv) Steam boiler cost ₹ 55 lakh with residual value 5 lakhs after life of 10 years.

(v) Cost of Generating Plant is ₹ 90 lakhs with no residual value. Depreciation is charged on
straight line method

@ 10%

(vi) Generating Plant : 100 skilled workers@ ₹30,000 & 150 helpers @ ₹20,000 pm.

(vii) Boiler plant : 60 semi-skilled workers @ ₹25,000 & 100 helpers @ ₹20,000 pm

(viii) Repair & Maintenance of generating plant & Boiler is ₹5.0 lakhs

(ix) Share of Administrative charges ₹20 lakh

(x) Realization from Sale of ash disposed is ₹ 1.5 lakh

Prepare a cost sheet for Electricity Generating Cost and calculate cost per unit.

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Solution

Particulars Amount ₹ in lakhs

Material Cost
Coal (300 × 30,000) 90
Oil (5 × 1,60,000) 8
Water (6 × 3) 18
Total material cost 116
Wages
Generator Plant (100 × 30,000) + (150 × 20,000) 60
Boiler Plant (60 × 25,000) + (100 × 20,000) 35
Total wages 95
Depreciation
Generating Plant (90 × 0.10) 9
Boiler Plant ((55 – 5) / 10) 5
Total Depreciation 14
Repair & Maintenance (Generating & Boiler) 5
Administrative Expenses 20
Total Cost 250
Realisation from Sale of Ash -1.50
Net Total Cost 248.50
Effective Units Produced (After 5% Self-use) 95lakh units
Cost per Unit ₹2.6158

CAS 9 Packing Material cost

Question 23 Dec-2021 (Syl-2016)

How would you assign primary and secondary packing materials cost as per CAS9?

Solution

Cost of primary packing materials shall form part of the cost of production and cost of secondary
packing materials shall form part of distribution overheads

CAS 10 Direct Expenses

Question 24 Dec-2021 (Syl-2016)

Find the Direct Expenses as per CAS 10 from the following: Finance charge on lease of Design
Rs25,000, Special Design Charges Rs 28,000, Software Development Charges related to

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 Production Rs 27,000, and Travelling abroad for Training Rs25,000.
Solution

Rs 28000+Rs 27000+ Rs25000 =Rs 80000 (finance charges will not form part of direct expenses.

Question 25

TROMA LTD., a manufacturing unit, produces two products PB and PS. The following information
is extracted from the Books of the Company for the year ended March 31, 2023:

Particular Product PB Product PS

Units Produced (Qty.) 2,10,000 1,68,000
Units sold (Qty.) 1,68,000 1,36,500
Machine hours utilized 1,26,000 84,000
Design charges ( ₹) 1,57,500 1,89,000
Software development charges (`) 2,62,500 3,78,000
Royalty paid on sales ₹6,09,000 [ @ ₹2 per unit sold for both the products].

(i) Royalty paid on units produced ₹3,78,000 [ @ ₹1 per unit produced for both the products].

(ii) Hire charges of equipment used in the manufacturing process of product PB only ₹53,000.

Note: No adjustments are to be made related to units held i.e. Closing Stock.

You are required to compute the Direct Expenses—keeping in view of Cost Accounting Standard
(CAS-10).

Solution

TROMA LTD.

Computation of Direct Expenses (As per CAS-10)

Amount in ₹

Particulars Product PB Product PS

Royalty paid on sale 3,36,000 2,73,000
Add: Royalty paid on units produced 2,10,000 1,68,000
Add: Hire charges of equipment used in the manufacturing 53,000
process of product-PB only
Add: Design charges 1,57,500 1,89,000
Add: Software development charges related to 2,62,500 3,78,000
production
Direct expenses (total) 10,19,000 10,08,000

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CAS 12 Repairs and Maintenance Cost

Question 26

As per the CAS-12, how should high value spare, when replaced by a new spare and
reconditioned, be treated?

Solution

As per CAS-12 on Repairs and Maintenance Cost, high value Spare, when replaced by a new spare and
reconditioned, should be recognised as property, plant and equipment when they meet the definition
of property, plant and equipment and depreciated accordingly. Otherwise, such items are to be
classified as inventory and recognised in cost as and when they are consumed.

Question 27

A Company purchased equipment for ₹10 crore and the insurance spare was ₹ 1 crore. If the
company is covered under Ind AS, such spare is capitalized as Property, Plant and equipment.
After use for five years, the equipment broke down and a part was replaced with the aforesaid
insurance spare. After 5 years, the depreciated value of equipment is `5 crore. As property,
plant and equipment are depreciated when they are available for use, accordingly the
depreciated value of new spare is ₹50 lakh. The old spare was reconditioned and the cost of
reconditioning is ₹10 lakh. As per the estimated life of the old spare for future economic
benefits, the current market value of the reconditioned old spare has been estimated at ₹25
lakh. The amount to be treated in repairs and maintenance is ₹ 35 lakh as follows:

Solution

Particulars Amount ₹ in crores

Equipment Cost 10
B. Cost of New Spare 1
Total Cost 11
Depreciation for 5 years 5.5
Depreciated value of equipment and spare [₹ 5 + 0.50] 5.5
Reconditioning cost of old spare 0.10
Depreciated value of old spare 0.50
Book value reconditioned spare 0.60
Current market value of reconditioned spare to be restated in Books of 0.25
Account
Amount to be treated in Repairs and Maintenance 0.35

CAS 16 :Depreciation and Amortization

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Question 28 June - 2023 (syl-2022)

What are the principles of measurement, to be followed for Depreciation and Amortisation, as
per Cost Accounting Standard-16?

Solution

Principles of Measurement for Depreciation and Amortisation (CAS 16):

Depreciation and Amortisation shall be measured based on the depreciable amount and the useful
life. The residual value of an intangible asset shall be assumed to be zero unless:

There is a commitment by a third party to purchase the asset at the end of its useful life; or

There is an active market for the asset and:

Residual value can be determined by reference to that market; and

It is probable that such a market will exist at the end of the asset’s useful life.

The residual value of a property, plant and equipment shall b considered as zero if the entity is
unable to estimate the same with reasonable accuracy.

The minimum amount of depreciation to be provided shall not be less than the amount calculated as
per principles and methods as prescribed by any law or regulations applicable to the entity and
followed by it.

In case of regulated industry, the amount of depreciation shall be the same as prescribed by the
concerned regulator.

While estimating the useful life of a depreciable asset, consideration shall be given to the following
factors: Expected physical wear and tear;

Obsolescence; and

Legal or other limits on the use of the asset.

The useful life of an intangible asset that arises from contractual or other legal rights shall not
exceed the period of the contractual or other legal rights, but may be shorter depending on the
period over which the entity expects to use the asset.

If the contractual or other legal rights are conveyed for a limited term that can be renewed, the
useful life of the intangible asset shall include the renewal period(s) only, if there is evidence to
support renewal by the entity without significant cost. The useful life of a re-acquired right
recognised as an intangible asset in a business combination is the remaining contractual period of
the contract in which the right was granted and shall not include renewal periods.

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The useful life of an intangible asset, in any situation, shall not exceed 10 years from the date it is
available for use.

Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management.

An asset which is used only when the need arises but is always held ready for use.

Example: Fire extinguisher, stand by generator, safety equipment shall be considered to be an asset
available for use.

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for
sale (or included in a disposal group that is classified as held for sale) or the date that the asset is
de-recognised.

Depreciation of any addition or extension to an existing depreciable asset which becomes an integral
part of that asset shall be based on the remaining useful life of that asset.

Depreciation of any addition or extension to an existing depreciable asset which retains a separate
identity and is capable of being used after the expiry of the useful life of that asset shall be based
on the estimated useful life of that addition or extension.

The impact of higher depreciation due to revaluation of assets shall not be assigned to cost object.
Impairment loss on assets shall be excluded from cost of production.

The method of depreciation used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity.

An entity can use any of the methods of depreciation to assign depreciable amount of an asset on
systematic basis over its useful life.

For example: Straight-line method, Diminishing balance method and Units of production method.

The method of amortisation of intangible asset shall reflect the pattern in which the economic
benefits are expected to be consumed by the entity.

The methods and rates of depreciation applied shall be reviewed at least annually and, if there has
been a change in the expected pattern of consumption or loss of future economic benefits, the
method applied shall be changed to reflect the changed pattern.

Items such as spare parts, stand-by equipment and a servicing equipment are recognised as property,
plant and Equipment when they meet the definition of Property, Plant and Equipment and depreciated
accordingly. Otherwise, such items are classified as Inventory and recognised in cost as and when
they are consumed.

Cost of small assets shall be written off in the period in which they were purchased as per the
accounting policy of the entity.

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Depreciation of an asset shall not be considered in case cumulative depreciation exceeds the original
cost of the asset, net of residual value.

Where depreciation for an addition of an asset is measured on the basis of the number of days
for which the asset was used for the preparation and presentation of financial statements,
depreciation of the asset for assigning to cost of object shall be measured in relation to the period,
the asset actually utilized.

CAS 22 Manufacturing Cost

Question 29 Dec 2021

You are required to write Short Note on Materials Consumed as per CAS-22

Solution

Materials Consumed as per Cost Accounting Standard - 22:

Materials consumed includes materials directly identified for production of excisable good such as:

(i) indigenous materials

(ii) Imported materials

(iii) Bought out materials

(iv) Self-manufactured items

(v) Process materials and other items

(vi) Materials received free of cost or at concessional value from the buyer

(vii) Accessories, on which cenvat credit is admissible, and which are cleared along
with the final product

(viii) goods used for providing free warranty for excisable goods

GACAP

Question 30 Dec-2021 (Syl-2016)

What is Generally accepted cost accounting principles?

Solution

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The purpose for a compilation of GACAP is to bring uniformity in cost accounting principles and
standard for Indian industry. [The Companies (Cost Records and Audit) Rules, 2014 require
maintenance of cost records according to GACAP and Cost Accounting Standards.]

Question 31

How do you define 'Packing Material' as per the Generally Accepted Cost Accounting Principle?
What is the treatment of such cost?

Solution

The Cost Accounting Standard on Packing Material Cost (CAS 9) defines Packing Materials as
materials used to hold, identify, describe, store, protect, display, transport, promote and make the
product marketable.

Packing Materials for the purpose of the standard are classified into primary and secondary packing
materials. Primary Packing Material is that packing material which is essential to hold and preserve
the product for its use by the customer. Secondary Packing Material is that packing material that
enables to store, transport, inform the customer, promote and otherwise make the product
marketable. For example, in

‗pharmaceutical industry‘, cartons used for holding strips of tablets and card board boxes used for
holding cartons.

Packing material costs shall be directly traced to a cost object to the extent it is economically
feasible. Where the packing material costs are not directly traceable to the cost object, these may
be assigned on the basis of quantity consumed or similar measures like technical estimates. The
packing material cost of reusable packing shall be assigned to the cost object taking into account
the number of times or the period over which it is expected to be reused. Cost of primary packing
materials shall form part of the cost of production. Cost of secondary packing materials shall form
part of distribution overheads.

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