COST ACCOUNTING STANDARDS

Illustration 1.
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 2017-18, determine the employees cost according to CAS -7.

RS.IN LAKHS

(i) Salary, wages and other 750

allowances
(ii) Bonus 100
(iii) Contribution to Providend 90
Fund
(iv) Wages to contractors 100
employees
(v) Employees welfare 40
(vi) Abnormal cost due to strike 80
(vii) VRS payment for closure of 62
Rod Iron section of the
plant
(viii) Arear Salary (2016-17) 210
(ix) Compensation paid against 67
the past periods against
Court order
Answer:
The following items will not be included according to CAS-7:
(i) VRS paid for closure of an unit
(ii) Abnormal cost charges to Profit and Loss A/C
(iii) Area salary not related to the current year
(iv) Compensation paid against past periods
(v) Wages paid to contractor employees.
[As per explanation(1) of CAS-7 under para-4.7: Contract employees include employees directly
engaged by the employer on contract basis but does not include employees of any contractor engaged
in the organisation.]

Thus, employees cost : RS.IN LAKH

(i) Salary and wages 750

(ii) Contribution to PF 90
(iii) Employees welfare 40
(iv) Bonus 100
Total 980
COST ACCOUNTING STANDARDS
Illustration 2.

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 @ Rs. 30,000 per MT

(ii) Oil 5 MT @ Rs. 1,60,000 MT

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

(iv) Steam boiler cost Rs. 55 lakh with residual value5 lakhs after life of 10 years.

(v) Cost of Generating Plant is Rs. 90 lakhs with no residual value. Depreciation is charged on straight
line method @ 10%

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

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

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

(ix) Share of Administrative charges Rs. 20 lakh

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

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

ANSWER:

Calculation Rs. Lakh

Material cost
Coal 300 x 30,000 90.00
Oil 5 x1,60,000 8.00
Water 6x3 18.00
Total Material Cost 116.00
Wages for Generator Plant (100 × 30,000) + (150 x 20,000) 60.00
Wages for Boiler plant (60 x 25,000) + (100 × 20,000) 35.00
Depreciation - Generating Plant 90 x 0.10 9.00
Depreciation- boiler plant (55-5) /10 5.00
Repair & Maintenance of generating plant & boiler 5.00
Administraive Exp 20.00
Total Cost 250.00
COST ACCOUNTING STANDARDS
As generating unit consumes 5%, effective unit produced for manufacturing = 95 lakh Cost per
unit = Rs. 250/95 = Rs. 2.63

Illustration 3.
During the Energy Audit of Reliable Engineering Ltd., the following figures relating to usage of
power were placedVbefore the Auditor:

2017-18 2016-17 2015-16

Total Power consumed (kWh) 2642720 2744360 2393250
Rate per kWh (Rs.) 6.29 5.42 4.90
Total Production (in million kg.) 422.16 416.36 376.08
Compute the necessary productivity measures and (i) Price Variance and
(ii)Volume Variance of power usage during these years.
Answer:
The power usage of Reliable Engineering Ltd. is given below along with the
productivity measures and PriceVariance and Volume Variance.

2017-18 2016-17 2015-16

1. Power consumed (KWh) 26,42,720 27,44,360 23,93,250
2. Production (in million kg.) 422.16 416.36 376.08
3. Rate per KWh (Rs.) 6.29 5.42 4.90
4. Power Cost (Rs.) [1 x 3] 16,622,709 14,874,431 11,726,925
5. Power Cost/‘000 kg. (Rs.) 39.375 35.725 31.182
6. Price Variance (Rs.) 22,99,166 14,27,067
7. Volume Variance (Rs.) 2,28,375 14,39,003

Workings:
(1)

2017-18 2016-17
Price Variance : 26,42,720 x (6.29 – 5.42) 22,99,166
: 27,44,360 x (5.42 – 4.90) 14,27,067
Volume Variance : [ Rs. 39.375 x (422.16 – 416.36)] 2,28,375
×1,000 kg.
: [ Rs. 35.725 x (416.36 – 376.08)] × 1,000 14,39,003
kg.
COST ACCOUNTING STANDARDS
2)
Million kg = 10,00,000 kg
422.16 in kg. = 42,21,60,000 kg
1000 kg. = 4,22,160 units
For 2017-18, Power Cost/ ‘000 kg

= 1,66,22,709 / 4,22,160 = 39.375 and so on

Illustration 4.

TROMA LTD., a manufacturing unit, produces two products PB and PS. The following
information is extracted fromthe Books of the Company for the year ended March 31, 2018:

Particulars 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 (Rs.) 1,57,500 1,89,000
Software development charges (Rs.) 2,62,500 3,78,000
Royalty paid on sales Rs.6,09,000 [ @ Rs. 2 per unit sold for both the products].
(i) Royalty paid on units produced Rs.3,78,000 [ @ Rs.1 per unit produced for both the
products].
(ii) Hire charges of equipment used in the manufacturing process of product PB only
Rs.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.

Answer:
TROMA LTD.

Computation of Direct Expenses (As per CAS – 10)

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 53,000 —
manufacturing process ofproduct-PB only
Add: Design charges 1,57,500 1,89,000
Add: Software development charges related to production 2,62,500 3,78,000
Direct expenses (total) 10,19,000 10,08,000
COST ACCOUNTING STANDARDS
Illustration 5.

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

Answer:

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.

Example: A Company purchased equipment for Rs.10 crore and the insurance spare was Rs. 1
crore. If the company is covered under INDAs, 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 Rs.5
crore.

As property, plant and equipment are depreciated when they are available for use,
accordingly the depreciated value of new spare is Rs.50 lakh. The old spare was
reconditioned and the cost of reconditioning is Rs.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 Rs.25 lakh. The amount to be
treated in repairsand maintenance is Rs. 35 lakh as follows:

(Rs. In
Crores)
A. Equipment Cost 10.00
B. Cost of New Spare 1.00
Total Cost 11.00
Depreciation for 5 years 5.50
Depreciated value of equipment and spare [Rs. 5 + 0.50] crore 5.50
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 0.25
Books of Account
Amount to be treated in Repairs and Maintenance 0.35
COST ACCOUNTING STANDARDS
Illustration 6.

Standard Material requirement to produce 1000 units of product X is 1200 units of material
at a standard price of Rs. 60 per unit. The Standard allows for reject of 25% of input. It is
estimated that one third of rejects can be reworked at an additional cost of Rs. 20 per unit. Scrap
units can be sold at Rs. 5 per unit.

During a particular period, units produced were 19500 with 24000 units of materials at
standard cost of Rs. 60 per unit, 7000 units were rejected out of which 2500 units were
reworked at a cost of Rs. 51000. The balance units weresold as scrap for Rs. 5 per unit.

Calculate Material Quality variance and Scrap Variance.

Answer:

Quality control cost is the cost of resources used for quality

control procedures.Standard Material cost : 1

Material 1200 units Standard Cost (Rs.) 72,000

Rejection 300 units
Reworked Unit =100 Rework cost (Rs.) 2,000
Scrap of 200 units Sale value of scrap (Rs.) -1,000
73,000
Unit Produced 1000 (1200 - Std Cost per unit Rs. 73.00
200)

Actual Material cost :

Material 24000 units Actual Cost (Rs.) 14,40,000

Rejection 7000 units
Reworked Unit = 2500 Rework cost (Rs.) 51,000
Scrap of 4500 units Sale value of scrap (Rs.) -22,500
14,68,500
Unit Produced 19500 (24,000 - Actual Cost per unit 75.31
4,500)

Material Quality Variance = Actual Material cost – Actual Quantity x Std Rate

= Rs. 14,68,500 – (19500 × 73) = 14, 68,500 – 14,23,500 = Rs. 45,000 (A)

Material Usage Variance = Actual Quantity × Std Rate - Std Quanity × std Rate

= Std Rate (Actual Quantity – Std Quantity) = 60 (24,000 –19,500 × 6/5)

= 60 (24,000 – 23, 400) = 60 × 600 = Rs. 36,000 (A)

COST ACCOUNTING STANDARDS

For Scrap Variance

Actual scrap = Rs. 22,500

Scrap value as per standard = 19,500 × (1/5)

× 5 = 19,500

Scrap Variance = Rs. 3,000 (F)

Material cost/unit = 72,000 / 1200. = Rs. 60 /unit