|Global Knowledge Gateway||
Performance & Financial Management
The Societal Importance of Cost Accounting Standards Issued by the Institute of Cost Accountants of India
by Rakesh Singh, Chairman, Cost Accounting Standards Board, Institute of Cost Accountants of India | June 17, 2014 | 4
IFAC’s mission statement gives due emphasis to the public interest and recognizes that a fundamental way to protect this public interest is to develop, promote, and enforce internationally recognized standards as a means of ensuring the credibility of information upon which investors and other stakeholders depend. IFAC, therefore, strives to serve the public interest through the facilitation of the development of standards in auditing, education, ethics, and public sector financial reporting by:
- advocating for transparency and convergence in financial reporting; and
- implementing a membership compliance program.
IFAC also provides International Good Practice Guidance for professional accountants in business.
In line with this framework, and even prior to the foundation of IFAC, professional and regulatory bodies all over the world develop accounting standards based on generally accepted principles and practices followed in their countries. These have been enforced through law, promoted by a regulatory mechanism, or voluntarily followed by all business entities. Standards help to ensure uniformity and consistency in the preparation and reporting of various financial statements.
Post-World War II, all economies, irrespective of their economic structure, started to lay much greater emphasis on cost accounting principles and ensured that all business organizations follow them, at the very least when dealing with the state. Cost accounting was developed as a separate discipline in accountancy, and promoted efficiency in resource utilization. Gradually, new skills developed in this field and it slowly attained a prime position in any organization’s functioning.
IFAC’s International Good Practice Guidance, Evaluating and Improving Costing in Organizations, highlights the importance of cost accounting to organizations:
The creation, operation, alteration, and cessation of every action and function in an organization, whether within the private, public, or voluntary sector—all incur costs. Costing—the accumulating and assigning of costs to the organization’s various activities—enables the organization’s cost structure to be understood, explained, and improved.
The guidance recognizes the importance of costing in assessing organizational performance in terms of shareholder and stakeholder value. It informs how profits and value are created, and how efficiently and effectively operational processes transform input into output. It includes product, process, and resource-related information covering the organization and its value chain. Costing information provides feedback on past performance but should also be used effectively to motivate future performance.
In India, the Cost Accounting Records Rules set by the government for 44 industries deal with the various items of cost and the way in which they have to be reported in the Cost Statement in accordance with the cost accounting principles. Since there were no generally accepted cost accounting principles, these were left to be understood by each company or by each cost accountant, as they understand or with reference to the explanations given in various textbooks on the subject.
This led to adoption of practices with a lack of uniformity in preparation and presentation of cost statements. To promote uniformity, there was an urgent need to integrate, harmonize, and standardize the cost accounting principles and practices. Therefore, the Generally Accepted Cost Accounting Principles have been clearly defined and well documented in the form of the Cost Accounting Standards.
The Cost Accounting Standards:
- provide a structured approach to measurement of costs in manufacturing process or service industry;
- integrate, harmonize, and standardize cost accounting principles and practices;
- provide guidance to users to achieve uniformity and consistency in classification, measurement, assignment, and allocation of costs to products and services;
- arrive at the basis of computing the cost of product, activity, or service where required by legal or regulatory bodies;
- enable practicing members to make use of Cost Accounting Standards in the attestation of General Purpose Cost statements; and
- assist in clear and uniform understanding of all the related issues by various user organizations, government bodies, regulators, research agencies, and academic institutions.
Facilitating and promoting uniformity and consistency not only helps in better understanding (e.g., clear and in a uniform manner) of all the related issues by companies and/or by the professional fraternity, but it also helps various user organizations, government bodies, regulators, research agencies, and academic institutions. Clearly defined and well-documented Generally Accepted Cost Accounting Principles govern a highly professional job that can only be done by the concerned professional bodies and individuals in India.
Precisely for these reasons, various national level institutes have issued or are in the process of issuing standards in areas under their domain. For example, the Institute of Chartered Accountants of India issues financial accounting and auditing standards; Institute of Company Secretaries of India issues secretarial standards; and the Institute of Cost Accountants of India issues cost accounting and audit standards. The Institute of Cost Accountants of India has assigned topmost priority for issuing all required cost accounting standards. These are prepared in consultation with all stakeholders.
The Cost Accounting Standards are principles based, deal with the principles of costing, and provide guidance on the preparation of General Purpose Cost Statements, which require attestation by the cost accounting profession, wherever applicable. The Cost Accounting Standards Board (CASB) should also keep in focus the Generally Accepted Cost Accounting Principles and codify them so that with the passage of time, an accepted framework of can evolve and remain capable of adoption by all users of the standards, including industries, professionals, and other stakeholders.
The Cost Accounting Standards framework has been adopted by the CASB with the following structure:
- Introduction: brief details about the topic and its role in the cost statements
- Objectives: basic objective that necessitated the standard
- Scope: scope of applicability
- Definitions: terminology used in the standard
- Principles of Measurement: principles behind the ascertainment, measurement, determination, and categorization of elements of cost
- Assignment of Costs: basis of assignment of costs to the product or service and the generally accepted cost accounting principles behind such assignment
- Presentation: essence of the standard and the prescriptive nature to be followed for any certification requirement
- Disclosure: specific disclosures required in the presentation to provide clarity
The CASB has identified 39 areas for developing the CASs, which include the 22 standards so far. Of these, 21 areas relate to components of cost and the remaining 18 areas are on cost accounting methodologies. These areas are broadly in line with the Cost Accounting Records Rules already framed by the government and in vogue for different industries.
Title of Cost Accounting Standard
Classification of Cost
Cost of Production for Captive Consumption
Average (equalized) Cost of Transportation
Cost of Utilities
Packing Material Cost
Repairs And Maintenance Cost
Cost of Service Cost Centre
Pollution Control Cost*
Selling and Distribution Overheads
Depreciation and Amortisation
Interest and Financing Charges.
Research and Development Costs
Royalty and Technical Know-How Fee
Help IFAC improve the Global Knowledge Gateway.
Click to recommend this article.
July 1, 2014
Government of India refines cost audit rules
Press Information Bureau
Government of India
Ministry of Corporate Affairs
30-June-2014 21:20 IST
Notification relating to Companies(Cost Records and Audit) Rules
The Ministry has issued notification relating to the Companies (Cost Records and Audit) Rules, 2014 under section 148 of the Companies Act, 2013. The last date for filing application for appointment of cost auditor under earlier rules was 30th June, 2014. Keeping this in view the new rules have been notified today.
These rules supersede eight sets of rules notified under the Companies Act, 1956. The new rules specify four classes of companies which shall be required to maintain cost records and who will be subject to cost audit. Relevant e-Forms would be made available on the MCA portal shortly.
The Notification is available on the Ministry’s website at www.mca.gov.in
The new rule is discussed at the Economic Times at http://economictimes.indiatimes.com/news/economy/policy/government-ushers-in-strict-cost-audit-norms-for-companies-in-public-facing-businesses/articleshow/37575056.cms and moneycontrol.com http://www.moneycontrol.com/news/economy/corporate-affairs-min-tweaks-cost-audit-norms_1115920.html
June 20, 2014
Expert group recommendation in 2009 on cost records.
UMMARY OF OBSERVATIONS AND RECOMMENDATIONS OF THE EXPERT GROUP
RECOMMENDATION NO. 1:
As the Expert Group has subsequently recommended, phased introduction of cost accounting and cost audit framework in all companies to achieve the highest levels of competitiveness, the Expert Group also recommends that only such companies maturing into higher levels of adoption of best cost and management accounting practices/guidelines may be permitted voluntary compliance.
RECOMMENDATION NO. 2:
Therefore, the Expert Group recommends that individual Cost Accounting Records Rules (CARR) prescribing product wise formats for maintenance of cost records are not required. As such, necessary cost data should logically emanate from the same set of primary books of account and other accounting data/records.
RECOMMENDATION NO. 3:
Therefore, the Group recommends that in order to enhance the competitiveness of the company, the term “class of companies” under the existing section 209(1)(d) of the Companies Act, 1956, should be considered at the company level rather than at the product level. This will facilitate focus shift to the enterprise governance.
RECOMMENDATION NO. 4:
In view of this, the Group recommends that all companies (excluding the exempted categories), should maintain cost accounting records in respect of utilisation of materials, labour or other items of cost, as an integral part of books of account. However, in order to promote uniformity and consistency in the preparation and presentation of cost statements under different statutes and under WTO, it is also recommended that such cost accounting records should adhere to the cost accounting standards issued by ICWAI that have integrated, harmonized and standardized the generally accepted cost accounting principles and practices. The above should be introduced in a phased manner as recommended in a later paragraph.
RECOMMENDATION NO. 5:
Therefore, the Expert Group recommends that it should be the management’s prerogative to choose appropriate cost management framework. The Group also recommends that the Government, professional bodies and industry associations should play a pro-active role in promoting such competitiveness of India Inc. by undertaking sector-based competitiveness and benchmarking studies. The Group further recommends that ICWAI should undertake an exercise to suggest sector specific standard costs on priority basis.
RECOMMENDATION NO. 6:
Based on the wide-spread opinion expressed by all categories of stakeholders to provide due flexibility to the companies to have a sound cost accounting framework, as also to reduce their compliance cost, the Expert Group recommends as under:
a. Maintenance of cost accounting records by the corporate sector should be shifted from the existing rule/format-based mechanism to a principle-based mechanism having universal application.
b. Maintenance of cost accounting records by the corporate sector should be based on generally accepted cost accounting principles that have to be integrated, harmonized and standardized in the Cost Accounting Standards (CAS) to be issued by ICWAI in consultation with all stakeholders and in harmony with the Indian GAAP and Accounting Standards. The Group has already made detailed recommendations in the relevant chapter on CAS.
c. As recommended by the Working Group, this may be done in a phased manner as under:
Phase-I: No change in the existing provisions under section 209(1)(d) of the Companies Act, 1956 required.
In place of all the existing CARRs, single combined CARR should be notified.
Scope of CARR should cover all companies (except the micro & small companies) engaged in the production, processing, manufacturing or mining activities.
No change in the existing provisions under section 209(1)(d) of the Companies Act, 1956 required.
All the Cost Accounting Standards issued by ICWAI should be adopted under the Companies Act, 1956 based on the recommendations of either the existing NACAS or a similar body to be set-up.
Single combined CARR as notified in Phase-I should be replaced with modified CARR containing adherence to the Cost Accounting Standards issued by ICWAI.
The existing provisions under section 209(1)(d) of the Companies Act, 1956 should be amended as under: Section 209(1)(d): Every company shall keep at its registered office proper books of account with respect to utilization of material or labour or to other items of cost as may be prescribed by the Central Government. The Central Government may, by notification in the Official Gazette, exempt any company or class of companies from compliance with any of the requirements of section 209(1)(d), if in its opinion, it is necessary to grant the exemption in the public interest. Scope of CARR as notified in Phase-II above should cover all companies.
d. ICWAI should issue simplified format/proformae for preparation and presentation of requisite cost data/information for the benefit of industry & professional fraternity. e. For certain regulated industries such as electricity, telecommunications, petroleum & natural gas, etc., ICWAI should issue industry-specific guidelines in consultation with the concerned regulatory body and industry association. f. A sample of combined simplified CARR is enclosed.
RECOMMENDATION NO. 7:
In view of above, the Group recommends that the existing provision of exemption to small scale industrial undertakings, as defined in the Industries (Development and Regulation) Act, 1951 from the requirement of maintaining cost accounting records should be continued.
RECOMMENDATION NO. 8:
Accordingly, the Expert Group recommends that all micro & small scale industrial undertakings, as defined in the Micro, Small and Medium Enterprises Development Act, 2006 should continue to remain exempted from the requirement of maintaining cost accounting records even if they belong to class of companies engaged in the production, processing, manufacturing or mining activities, subject to the following conditions. Such companies should also remain outside the ambit of cost audit.
a. The aggregate value of the machinery and plant installed wherein, as on the last date of the immediate preceding accounting year, does not exceed limit as specified for a small scale industrial undertaking under the provisions of Micro, Small and Medium Enterprises Development Act, 2006;
b. The aggregate value of the turnover made by the company from sale or supply of all its products during the immediate preceding accounting year does not exceed twenty crore of rupees;
c. The company’s equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;
d. It is not a bank, financial institution or an insurance company; e. It does not have borrowings (including public deposits) in excess of rupees five crore at any time during the immediately preceding accounting year; and
f. It is not a holding or subsidiary company of a company which is not a small sized company.
RECOMMENDATION NO. 9:
Taking into account the aforesaid, the Expert Group recommends as under: I. All medium size companies should maintain cost accounting records based on generally accepted cost accounting principles and cost accounting standards, as may be notified under section 209 (1)(d) of the Companies Act, 1956.
II. With a view to avoid incidence of any additional cost of compliance, such class of companies should also be exempted from the provisions of cost audit under section 233B of the Act.
III. Such companies should only file a compliance report with the Central Government, on a proforma to be notified, from a cost accountant certifying requisite maintenance of cost accounting records, as notified under section 209 (1)(d) of the Act.
IV. Medium size companies should be classified based on investment in plant & machinery exceeding Rs.5 crore but not exceeding Rs.10 crore (as defined in the statute) and annual turnover exceeding Rs.20 crore but not exceeding Rs.50 crore in the immediately preceding accounting year. While calculating annual turnover, any turnover from trading operations, consultancy services, other incomes, etc. in a manufacturing organisation will not be considered. But turnover from job work or loan license operations would stand included.
V. Other conditions that would apply to a medium size company shall be as under:
a. The aggregate value of the machinery and plant installed wherein, as on the last date of the immediate preceding accounting year, does not exceed limit as specified for a medium size industrial undertaking under the provisions of Micro, Small and Medium Enterprises Development Act, 2006;
b. The aggregate value of the turnover made by the company from sale or supply of all its products during the immediate preceding accounting year does not exceed fifty crore of rupees;
c. The company’s equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;
d. It is not a bank, financial institution or an insurance company;
e. It does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and
f. It is not a holding or subsidiary company of a company which is not a small and/or medium sized company.
RECOMMENDATION NO. 10:
In view of this, the Expert Group recommends that the existing practice of notifying industry/product wise CARR and ordering product-wise cost audit orders only on selective companies, seeking unit-wise cost details and other data/information, should be dispensed with.
RECOMMENDATION NO. 11:
In view of above, the Expert Group strongly endorses the Working Group’s recommendation that there is need to continue the cost audit mechanism. However, to save costs, to ensure complete confidentiality of company’s sensitive cost data and to avoid any possible misuse, present structure of cost audit report need to be modified and the formats prescribed therein needs to be simplified.
RECOMMENDATION NO. 12:
Keeping the aforesaid in view, the Group recommends that,
(a) The existing practice of a company covered under section 209(1)(d) of the Companies Act, 1956 and not covered under section 233B ibid (except medium size companies that would be required to maintain cost accounting records but have been recommended for exemption from cost audit) should be discontinued;
(b) All companies should be asked to furnish information, either in Form 23AC (relating to e-filing of Balance Sheet) or in Form 23ACA (relating to e-filing of Profit & Loss Account), whether the company is covered under section 209(1)(d) of the Companies Act, 1956 relating to maintenance of cost accounting records;
(c) Cost audit orders under section 233B of the Companies Act, 1956 should be issued on all such companies that are not specifically exempted; and
(d) MCA-21 data should be used to identify such companies.
RECOMMENDATION NO. 13:
The Group has already recommended that all micro, small and medium size companies, engaged in the production, processing, manufacturing or mining activities, having investment in plant & machinery up to Rs.10 crore and annual turnover up to Rs.50 crore in the immediately preceding accounting year, subject to certain conditions, should be exempted from the provisions of cost audit under section 233B of the Companies Act, 1956. In addition, the Group recommends that other special categories such as section-25 companies, companies limited by guarantee and companies/associations not for profit, except those where any part of surplus income is allowed for distribution among the shareholders, companies having their total operations outside India, etc. should also be exempted from the ambit of cost audit.
RECOMMENDATION NO. 14:
Keeping these issues in mind, the Group recommends as under:
(a) Existing concept of filing unit-wise and product-wise cost audit report, introduced in 2001, should be dispensed forthwith. Filing of minute cost details for each factory/unit, within a factory/unit for each product, and within a product for each type/variety/description separately and all complexities in reporting have to be avoided. The revised structure should do away with providing detailed cost statements of individual products since the same compromises with the confidentiality and competitive edge of individual companies;
(b) Existing Cost Audit Report Rules, 2001, as amended in 2006, containing very detailed and complex reporting formats should be replaced with the new Cost Audit Report Rules, 2008;
(c) Only abridged statement containing product group-wise cost statements along with cost auditor's report should be filed with the Government. All other cost details, statements, schedules, etc. should remain with the company; and
(d) Cost auditor should submit detailed unit-wise and productwise cost statements, duly certified by him, to the company, which may be called for by any Government agency and/or regulator depending upon the need.
(e) A sample copy of modified Cost Audit Report Rules, containing modified Form-I & other formats is enclosed as Annexure-XVIII.
RECOMMENDATION NO. 15:
Accordingly, the Groups recommends as under:
(a) Product Group means a group of homogenous and alike products, produced from same raw materials & by using similar or same production process, having similar physical/chemical characteristics & common unit of measurement, and having same or similar usage/application; (b) Product Group can be considered as an alternate to “product family”. However, it cannot be considered as an alternate to the term “business segment” or “geographical segment” or “reportable segment” as defined in the Accounting Standard 17 for the purposes of reporting segment-wise financial results; (c) ICWAI should issue a Guidance Note on the subject within a period of three months, in consultation with national level industry associations; and (d) For the time being, the companies may be left free to correctly interpret the term “product group”, in consultation with the cost auditor, as best suited to their product range.
RECOMMENDATION NO. 16:
Therefore, as opined by all stakeholders/ interest groups and recommended by Working Group-III, the Expert Group recommends that apart from using the data/information available in the (modified) cost audit reports efiled with MCA, all Regulators, user Ministries/Departments, Financial Institutions/Banks and other Government Authorities may be left free to directly seek such additional cost details from the concerned companies, as may be required by them based on legal/quasi legal requirement as mandated under their respective statutes.
RECOMMENDATION NO. 17:
In view of above, the Working Group recommended that the existing provision of a Statutory (Financial) Auditor’s certificate under CARO certifying maintenance of cost records by the company should be discontinued. The Expert Group endorses this and recommends for immediate implementation.
RECOMMENDATION NO. 18:
The Expert Group has deliberated upon this issue and opines that transparency, accountability as well as independence of the cost auditor are very important determinants of good enterprise governance, and therefore, shareholders should be given the right to appoint cost auditors and have the cost auditor’s report for better evaluation of the company’s performance & risk management. However, until such time, it is decided to share any part of the cost audit report with the shareholders, the appointment of cost auditors by the shareholders is not practicable and hence the Expert Group suggests that this issue may be examined separately. However, to begin with, the shareholders must know that their company is covered by the cost audit mechanism. Therefore, the Expert Group endorses the recommendation of the Working Group that the cost auditors should be appointed by the Board of Directors of a company without seeking any prior approval from the Central Government (i.e. MCA) and reports the same to the shareholders in the Board of Directors’ Report.
RECOMMENDATION NO. 19:
Therefore, the Expert Group recommends that Indian companies should also follow this healthy practice of voluntarily rotating the cost auditors after every 3-5 years.
RECOMMENDATION NO. 20:
Therefore, the Group recommends that the existing proviso under sub-section (1) of section 233B of the Companies Act, 1956 may be deleted.
RECOMMENDATION NO. 21:
In view of this, the Expert Group recommends that as at present, periodicity of cost audit should remain on annual basis. In addition, the Group recommends quarterly internal audit of cost records. The Group further recommends that the possibility of introducing quarterly limited review of cost details, in case of listed companies, may be examined in consultation with SEBI.
RECOMMENDATION NO. 22:
After evaluating the pros & cons, the Working Group-III recommended that circulation of selected information to the shareholders of the company, containing cost trends, key performance indicators, risk assessment or key risk indicators, CSR details, trends or factors like external economic conditions and internal efficiency, etc., as part of the management analysis section of the annual report to meet with the overall objectives of good corporate governance, should be left to the discretion of the management. ICWAI should work out a model format in consultation with SEBI. This would align with the findings of IFAC survey on external financial reporting. The Expert Group endorses this. The Expert Group also recommends that in line with the earlier issue of appointment of cost auditors in the AGM, this issue may also be re-examined separately.
RECOMMENDATION NO. 23:
Hence, the Group recommends issue of Cost Accounting Standards based on the generally accepted cost accounting principles & practices presently followed by the industries in India. The Group recommends that all the Cost Accounting Standards (CAS) issued/to be issued should be aligned with the following key objectives: To provide a structured approach to measurement of costs in manufacturing, process or service industry; To integrate, harmonise and standardize cost accounting principles and practices; To provide guidance to the users to achieve uniformity and consistency in classification, measurement, assignment and allocation of costs to products and services; To arrive at the basis of computing the cost of product, activity or service where required by legal or regulatory bodies; To enable practicing member to make use of Cost Accounting Standards in the matter of attestation of General Purpose Cost statements; and To assist in clear and uniform understanding of all the related issues by various user organisations, government bodies, regulators, research agencies, academic institutions, etc.
RECOMMENDATION NO. 24:
Accordingly, the Group recommends that all the existing Cost Accounting Standards may also be restructured as per this revised framework and re-issued.
RECOMMENDATION NO. 25:
In view of this, the Group recommends that the revision of existing CAS as per the revised framework should be done in consultation with the concerned legal and/or statutory authority in the government so that the adoptability of use of these revised standards by such organisations is not disturbed.
RECOMMENDATION NO. 26:
Therefore, the Group recommends that within the revised framework of CAS, ICWAI should issue Application Guidance0 Note for each Cost Accounting Standard. The application guidance note should provide the explanatory notes and interpretations of various terminologies and methodologies referred to in the cost accounting standards with suitable illustrations and formats for presentation of cost statements.
RECOMMENDATION NO. 27:
Therefore, the Group recommends that ICWAI should assign utmost priority for issue of all the CAS already identified.
RECOMMENDATION NO. 28:
Therefore, the Group recommends that CAS may also be issued for all those areas (excluding the common areas already included in the list of 39) that are of use by the infrastructure or service sector companies.
RECOMMENDATION NO. 29:
In this regard, the Group recommends that Cost Accounting Standards Board and the Council of ICWAI should also follow the same process and issue the Cost Accounting Standards in consultation with all stakeholders viz. industry associations, companies, government organisations, regulatory authorities, user agencies, professional bodies, professional accountants in public practice, professional accountants in business, etc.
RECOMMENDATION NO. 30:
Therefore, the Group recommends that there should be complete alignment, synergy & harmonization between the Cost Accounting Standards and Financial Accounting Standards.
RECOMMENDATION NO. 31:
The Group further recommends that the Cost Accounting Standards Board of ICWAI, in consultation with the Accounting Standards Board of ICAI, should prepare a list of such items which need harmonization in two sets of standards i.e. Accounting Standards and Cost Accounting Standards and update the list periodically.
RECOMMENDATION NO. 32:
On specific cost related issues which require different treatment based on cost accounting principles, the Group recommends that any divergence should be disclosed as reconciliation between the Costing Profit & Loss Statement and Financial Profit & Loss Statement.
RECOMMENDATION NO. 33:
Therefore, the Group recommends that all the Cost Accounting Standards will also have to be reviewed and aligned with the relevant issues in IFRS.
RECOMMENDATION NO. 34:
The Group recommends that without sacrificing the basic objectives, the CAS should incorporate the best practices enshrined in the Cost Accounting Standards issued by different countries.
RECOMMENDATION NO. 35:
The Group further recommends that CAS should also follow, wherever applicable, the principles enshrined in the current International Good Practice Guidance and the Management Accounting Guidelines issued earlier by International Federation of Accountants (IFAC).
RECOMMENDATION NO. 36:
Therefore, the Group recommends that either the existing mandate of NACAS may be modified or a similar body be set up advising the Central Government on the formulation and laying down of cost accounting policies and standards for adoption by companies or class of companies under the Act. The Group further recommends that till such time, the cost accounting standards issued by ICWAI may be recognised as that prescribed by the Central Government.
RECOMMENDATION NO. 37:
In view of this, the Group recommends that after implementation of various recommendations made by this Group for revised mechanism/framework of cost audit & reporting in the corporate sector, no further steps are required to ensure complete confidentiality of company cost data. (including companies and industry associations), the Expert Group opines that after implementation of various recommendations made by the Expert Group for revised mechanism/framework of cost accounting records, cost audit and reporting in the corporate sector, there would be substantial reduction in the cost of compliance to the companies.
RECOMMENDATION NO. 38:
Keeping in view the aforesaid observations of WG-IV and the opinions expressed by various stakeholders (including companies and industry associations), the Expert Group opines that after implementation of various recommendations made by the Expert Group for revised mechanism/framework of cost accounting records, cost audit and reporting in the corporate sector, there would be substantial reduction in the cost of compliance to the companies.
RECOMMENDATION NO. 39:
Keeping the aforesaid observation in view, the Expert Group recommends as under: (a) All the services and other social sectors such as healthcare, education, banking, insurance, financial services, transportation, information technology, public utilities & essential services such as municipalities, electricity, water supply, city transport, etc. should be brought under the mandatory mechanism of cost accounting and cost audit. (b) The existing principles & practices of cost accounting and cost audit should also be extended to various Government projects/schemes, departmental undertakings, such as ordnance factories, railway locomotive/coaches manufacturing units, etc. and all the Government contracts and procurements should be covered forthwith. (c) All the infrastructure sector activities which include roads, seaports, airports, railways, telecom, power projects, industrial parks, urban infrastructure, exploration, refining, mining, etc. are backbone of the growth of any country; hence needs to be included under the provisions of cost accounting and cost audit. (d) All public service organisations should determine user charges based on most efficient costs. Subsidies meant for the poor may be decided after being fully aware of the opportunity cost, social factors and the shadow price. Even where crosssubsidization is necessary, it should be transparent and made known to the public at large. (e) Most of these sectors, services, functions or activities presently either operate as extension of Government ministries/departments or are governed by various Central/State Government statutes and/or resolutions. These are operated in both the corporate form as well as noncorporate form of organisations. In all the non-corporate and/or not-for-profit organisations, the existing principles & practices of cost accounting and cost audit may be extended by the respective authorities by suitably amending their laws/statutes. (f) Ministry of Corporate Affairs and the Chief Adviser Cost in the Ministry of Finance should take a lead role to spearhead the process of inculcating cost accounting systems in all these organizations/entities. (g) The Institute of Cost and Works Accountants of India should play a supportive role in (a) evolving suitable cost accounting systems; (b) issue of relevant cost accounting standards & guidance notes; and (c) in undertaking training of human resources in such organizations. (h) The Controller General of Civil Accounts and the Accountant Generals, in consultation with the Comptroller & Auditor General of India, should take a lead role in (a) modifying the existing budgetary system of the Central/State Governments; (b) recasting the outcome budgets by correctly evaluating the costs & benefits of each program/activity; and (c) improving the public information system.
June 20, 2014
CAS Justification Cost Accounting standards are basically an attempt to standardise the Cost Accounting practices among businesses and Governance. The Existing and Generally Accepted cost accounting practices are gradually attempted to be replaced with a set of documents in the nature of guidance to treatment of Transactions in the cost Accounting system of any enterprise,governance and charity.This will inturn standardise the practices of drawing general purpose cost statements for an entity, governance or charity and specifically standardise the entire Cost accounting practices in the entity, governance or charity.
General Purpose Cost Statements will generally address:
1.Total cost of production or service.(Average and incremental cost as a corollary)
2.Resource utilisation statement.
3.Wastage reports and recycling cost.
4.Production or service efficiency.
5.Project cost to benefit.
6.Varience reports on standard cost and budgeted cost.
STAKE HOLDERS THAT CAS will Transfer Benefit:
1.Business, its Management: Business survives on its operations and strategy both depends on proper measurement and timely reporting. An evolved cost accounting system exactly enables the right decision support in the area of operations and strategy by measuring Cost of production , resource consumption, wastage analysis ,Variances from the plan and helps In project planning,improving efficiency in operations and capital investment decision making.It also helps the management in reorienting, re-engineering the supply chain and enables assessment of improving revenues through alternative Cost incurrence path. Some of the standardised techniques such as Target Costing , life-cycle costing helps in real-time assessment of business sustainability.
2.Owners.-These category of stakeholders play dual role of Investor-manager, specially family owned businesses, they are keen on operations and strategy of the enterprise and are eager to improve the operation and devise a sustainable strategy for the enterprise. As an Investor they are permanent stakeholder and not fly-by-night kind of a investor, they look at long term projections and sometimes take certain steps that are pretty risky proposition to stay-put in the business.As there is no delienation between their role as manager and investor they are cautious as well on sustainability issues,An evolved cost accounting in the enterprise is a window for implementing their perception on operations and strategy into a decision goal.
3.Investors.-Investors are of different categories , the bankers and the FIIs, the venture capitalist and HNIs,all have different perception of how to make money out of money,the commonality being they stay away from business operation, though most of them may be satisfied by certain statements reflected in the Annual reports specially when the exit route is easy(liquidation of stakes through organised markets), they may yet be interested in specific operation details on Cost,Efficiency,Projections of revenue,product life-cycle,strategic goals for sustenance,resource availability among other things to make a clear decision to stay-invested.Most of these investors occupy board membership and hence become insiders from outside and have access to all data of operations.
4.Regulators.-these are authorities in the form of SEBI,RBI,tariff authorities,environment authority,energy regulator,Licensing authorities and others who may need specific window of access to operations regularly and would have either a tailor driven format to fill in and submit or may undertake regular physical inspection of records maintained.Most of these information pertains to Cost, Quality,wastage and efficiency and process transperancy.An evolved CAS would assure the regulators of relying on the reports generated for the purpose.
4A.Taxmen.-Tax authorities are keen in looking at the business from two angles 1. Income disclosure(direct taxes) 2.Production or service rendered figures(indirect).there are other tax authorities whose focus may not be business operations or generation of revenue. As far as direct taxes are concerned the taxmen rely heavily on computation of income derived from book profit.Computation of income has two aspect the allowances and disallowances which are based on the core principles that the aspect of allowances will be needed to sustain business and the aspect of disallowances would be needed to cut exhorbitance and notionality.
The primary defect in arriving at the computation of income currently is heavy reliance on Financial statements and judgemental nature of assessment,be it depriciation or investment allowance,there are two ends to each issue one is at the hands of the assessing which he pulls southward and the other is with the authorised representative which he pulls northward for the business.A "cost-based computation of income" is currently lacking even while framing various amendment in the finance act and also while assessing income of business for tax purpose.A right use of this technique will result in objective assessment of income and lesser disputes and lead to healthier business practices and compliance. Indirect taxmen requires data correlating Input-output and since the tax is based on production or rendering of service all the operational data are vital for assessment.Currently Indirect tax collection takes the help of existing cost accounting system where ever available and this needs to be nehanced and applicability made universal from current selective mandate.
5.Government.-Government and governance are focal point of any accountability mechanism and a Democratic-socialist republic of India which endeavour equality of opportunity and freedom, it is essential to ensure proper utilisation of resources,delivering the right product or services at reasonable cost.Government is entrusted with the planning process for overall development of the economy and society and to ensure this it needs to keep track of the Business to ensure its operations are not detrimental to the societal needs and an evolved CAS its consumption by the government will infuse healthy and transperant economic progress,Government has already an evolved mechanism of consumption of CAS through CARR and cost audit which need to mature at the highest level through good governance practices.
6.Courts.-Cases often reaches court specially under the consumer protection act,environmental laws and various other punitive legislations which require thorough insights into business operations before being judgemental on the issue.A transperant and an evolved mechanism of reporting to the management is assurance of credibility in the system and can be relied upon by the courts.
7.Consumers.-Consumers are the main stakeholders- interested- yet currently deprived of Cost statements and related details.As a consumer every one is interested in cost of product and the quality, while this needs a transperant and an accountable approach by the business, to assure the customers that they are not cheated,often these are never addressed as an issue and there are people in the establishment to propagate Demand-supply theory overarching other requirements and to that extent the society is yet to evolve.Some positive action has been taken by enactment of the consumer protection act to redress the grievance through courts.
8.General Public or Citizens.Democracy functions through representation and is run by the three pillers-the Legislature, executive and judiciary,The Polity of India belongs to all and deprives none.There is an assurance to equality of opportunity in the constitution and protection of socially and economically deprived.Economic deprivation occurs through cornering of wealth and commanding a price for it.While the resources of the country and its utilisation is the concern of the citizens who constitute the State, the right price and currently the environmental concerns cannot be neglected and hence the transperancy in doing business and assurance as to the cost, quality and price.
9.International community.A standardised Cost Accounting system which is accountable and transperant will reaasure the international community, which is globalised and moving towards global practices, that the price of the commodity and services they pay are realistic as to the cost components while adjusting to other value criteria,The resources of the globe are not wasted in the production processes and while rendering of service,that there is continuous innovation to improve efficiency of nations and their quality of output.CAS will enable such a decision support mechanism.
10.Environmentalist.We are green and we want to be in the near future and pass it on to the GenNext , so that the planet is not left barren.The concerns emerge from exploitation of resources that create imbalances. Greens want assurances from the micro-level and CAS will trigger a set of practices that will assure the world that activity performed in the course of business is not violating the nature.All utilisation reports will pass efficiency reviews and thus will enable business to be on track and address the concerns of the greens.
1.All Business and enterprise.
CAS Principles: Bringing about Commonality in--------
---------------------METHODOLOGIES of determining components of cost.
Using appropriate techniques..... For determination of ....
1.Unit cost of product/process/job/operation/or service.
2.Consumption of Resources on an average for the product/ process/ job/ operation or service.
3.Incremental usage of resources for the process dynamics.
7.Cost as a social obligation.
June 18, 2014
Infact considering the benefits that accrue to various stakeholders since its recognition in law way back in 1965 the Government of India took a stock of the same by a comprehensive review report submitted by a constituted EXPERT group the report running into 650 pages gave specific recommendations for enlargement of the scope of cost accounting compliance and consequently in 2011 encompassing rules were framed and inforce. While accounting and accountability are a part of economic activity and social governance there is a need to harmonise practices specially considering the diverse environment that polity emerges in various geographies and the groupings.There is no denial in global recognition of equality,ethics and environment that can be achieved by a credible set of information and reporting to governance enhancement.Cost accounting strives to achieve this end of bringing equality in the planet based on ethical spending in a clean environment and hence IFAC needs to engage economies to adopt this tool of governance for the welfare of the society at large.
September 22, 2014 - CPA Australia
September 18, 2014 - CGMA Magazine
September 16, 2014 - Financial Stability Board
September 10, 2014 - The Malaysian Insider
September 29, 2014 - The Business and Industry Advisory Committee (BIAC)
September 19, 2014 - Chartered Accountants Australia and New Zealand
September 17, 2014 - PwC
September 10, 2014 - Harvard Business Review
September 5, 2014 - Institute of Chartered Accountants of England and Wales
September 3, 2014 - Association of Chartered Certified Accountants
Suggest a Resource, News Item, Event, or Discussion Topic