The Societal Importance of Cost Accounting Standards Issued by the Institute of Cost Accountants of India
Rakesh Singh, Chairman, Cost Accounting Standards Board, Institute of Cost Accountants of India | June 17, 2014 | 7
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