GUIDANCE NOTE ON COST ACCOUNTING STANDARD ON COST OF PRODUCTION FOR CAPTIVE CONSUMPTION (CAS-4)
The Council of the Institute of Cost and Works Accountants of India has issued the Cost Accounting
Standard 4 (CAS-4) for Determination of Cost of Production for Captive Consumption. This standard lays
down the principles and methods for determining the cost of production of excisable goods used for
captive consumption, presentation and disclosure in the cost sheet.
This Guidance Note deals with the principles and methods as provided in CAS-4 and practical aspects
in connection with the determination of cost of production of excisable goods used for captive
consumption.
In the preparation of cost sheet including those requiring attestation, cost of production of excisable
goods used for captive consumption shall be determined as per CAS-4. The Cost Accounting Standards
have been set in bold italic type and reference number has been retained as in CAS-4 for ready
reference.
CAS 4 refers to Central Excise Act and Rules framed there under for determination of assessable value
of goods used for captive consumption. Therefore, this Guidance note refers to relevant sections of
Central Excise Act,1944, Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000,
other relevant rules thereto, case laws on the subject and provides methodology for determination
of assessable value of captively consumed goods on cost construction method as a measure of
simplification.
Circular No. 692/08/2003-CX dated 13th February, 2003 issued by Department of Revenue (CBEC) inter
alia provides “that for valuing goods which are captively consumed, the general principles of costing
would be adopted for applying Rule 8. The Board has interacted with the Institute of Cost & Works
Accountants of India (ICWAI) for developing costing standards for costing of captively consumed
goods.” Paragraph 3 of the above circular further provides:
“cost of production of captively consumed goods will henceforth be done strictly in accordance with
CAS-4…..”
The above circular is reproduced as Annexure I.
In view of above, CAS-4 is applicable from 13th February, 2003. The Department has, however, clarified
that though CAS-4 was approved by the Government of India on 13.2.2003, cases pending finalization
for the period earlier to this may be considered in line with costing principles laid down in CAS-4, issued
by the Institute of Cost and Works Accountants of India. Assessments finalized prior to 13th February,
2003 not to be opened.
CAS-4 applies to following type of organizations registered with Excise Department if goods manufactured
are for captive consumption:
1. Proprietorship concern
2. Partnership Firms
3. Cooperative Societies
4. Private/Public Limited Companies.
SSI units registered with Excise Department are exempt from payment of excise duty as per registration
conditions.
Introduction
The scheme of valuation of excisable goods is contained in Sec. 3A, Sec. 4 and Sec. 4A of the Central
Excise Act, 1944. The goods manufactured have to be valued in a prescribed manner as per above
provisions to determine the excise duty payable by the assessee. Section 3 provides that excise duties
shall be levied and collected on all excisable goods which are produced or manufactured in India at
the rates set forth in Schedule to the Central Excise Tariff Act, 1985. Section 4 provides the mechanism to
determine the value of goods subject to duty for the purpose of assessment. Section 4 was replaced by
new Section 4 w.e.f 1-07-2000 and concept of ‘transaction value’ has been introduced under Section
4(3)(d). Section 4A provides for valuation of excisable goods with reference to retail sale price and
applicable to commodities as notified by the Government from time to time and on which retail price
is required to be indicated under the provision of the Standard of Weights & Measures Act, 1976 and
the Rules made there under.
Section 4(1) (a) of Central Excise Act, 1944 deals with the Valuation of excisable goods when following
requirements are satisfied:
1. Goods are sold at the time and place of removal from factory/warehouse;
2. The assessee and the buyer of the goods are not related; and
3. The price is the sole consideration of sale.
Each transaction is treated as a separate transaction for valuation purposes.
If any one of the above requirements is not satisfied, assessable value shall be determined under the
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 notified on 30.6.2000, as
provided under Section 4(1)(b) of the Act. For ready reference extract of Section 4 of the Central Excise
Act, 1944 and the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 are
annexed as Annexure II and III. Rules 8 and 9 deal with the valuation of goods captively consumed.
Meaning of Captive Consumption:
“Captive Consumption” means that the goods are not sold by the assessee but are used for consumption
by him or on his behalf in the production or manufacture of other articles in the same premises or
elsewhere.
When goods manufactured are supplied to a related party who does not sell the goods but consumes the
same in manufacture of another product(s), such goods are also deemed to be “captively consumed”
for the purpose of valuation under Excise Laws.
In some cases during the manufacture, certain intermediate goods emerge and are used in
manufacture/production of other goods. The use of such intermediate product within the factory is also
termed as “Captive Consumption”.
Sometimes the goods are not removed from the factory but are used in the further manufacture/
production of goods and in such cases also, duty is payable as soon as the goods are manufactured/
produced within the factory unless exempted. Goods captively consumed in the same factory of the
manufacturer are exempted from duty as per Notification No. 67/95-CE dt.16.03.1995, if duty is payable
on the final product. For example, the manufacturer of motor vehicles manufactures various parts of
the motor vehicles like brakes, panels etc. These parts are also excisable goods and have separate
entry in the schedule to Central Excise Tariff Act, 1985. If these parts are removed from the factory, duty
is payable but if these parts are used in the same factory of the manufacturer in the assembly / further
manufacture of motor vehicles then the use of parts and components is called as captive consumption,
and is not subject to excise duty in view of above notification.
Type of Goods:
Following type of goods are covered under CAS-4:
1. Goods manufactured not sold but captively consumed
2. Goods manufactured partly sold and partly captively consumed
3. Goods manufactured sold to related party for captive consumption
Goods manufactured, not sold but captively consumed:
Rule 8 of the Central Excise Valuation Rules provides that where the excisable goods are not sold but
are used for consumption by assessee or on his behalf in the production or manufacture of other articles,
the value shall be 110% (as of now)of the cost of production or manufacture of such goods. (115% was
substituted by 110% vide notification no. 60 / 2003 – CE (NT) dated 05-08-2003) In other words, when
goods are captively consumed, the assessable value will be 110% of cost of production. The earlier
concept of deemed profit / notional profit has been done away and margin of 10% by way of profit etc
is prescribed in the rule itself for ease of assessment of goods used for captive consumption. The cost of
production is to be determined as per CAS-4 vide Government of India, Ministry of Finance & Company
Affairs (Department of Revenue’s Circular dated 13th February, 2003 (refer Annexure I)).
Judgement of Supreme Court dated 1.8.2006 :
In a landmark judgment dated 1.8.2006 in case No. Appeal (civil)2947-2948 of 2001 Commissioner of
Central Excise, Pune vs M/s Cadbury India Ltd.(Refer Annexure IV), Hon’ble Supreme Court of India,
observed :
“the Institute of Cost and Works Accountants of India (ICWAI) has laid down the principles of determining
cost of production for captive consumption and formulated the standards for costing: CAS-4. According
to CAS-4 the definition of “cost of production” is as under:
“4.1 Cost of Production : Cost of Production shall consist of Material consumed, Direct wages and salaries,
Direct expenses, Works overheads, Quality Control cost, Research and Development cost, Packing cost,
Administrative Overheads relating to production.”
“The cost accounting principles laid down by ICWAI have been recognized by the Central Board of Excise
and Customs vide Circular No.692/8/2003 CX dated 13.2.2003. The circular requires the department to
determine the cost of production of captively consumed goods strictly in accordance with CAS-4. “
The Tribunal in the case of BMF BELTINGS LTD. vs. CCE : 2005 (184) E.L.T. 158 (Tri. Bang.) for the period
1995 to 2000 has directed the department to apply CAS-4 for the determination of the cost of production
of the captively consumed goods. In ITC vs. CCE (190) ELT 119 the Tribunal held that the department
has to calculate the cost of production in terms of CAS-4. Other decisions of the Tribunal, wherein it
has directed that CAS-4 be applied for determination of the cost of production, are Teja Engineering
v/s CCE 2006 (193) ELT 100 (Tri-Chennai), Ashima Denims v/s CCE 2005 (191) ELT 318 (Tri-Mumbai), and
Arti Industries vs. CCE 2005 (186) ELT 208 (Tri-Chennai). This is therefore a consistent view taken by the
Tribunal. The department has not filed any appeal in these cases and accepted the legal position. Apart
from this, in the light of several decisions of this Court, the Department is also bound by the said circular
No.692/9/2003 CX dated 13th February,2003 issued by the CBEC.”
In view of the above judgement also,the cost of production for captively consumed goods is to be
determined as per CAS-4.
Valuation of Goods Partly Captively Consumed And Partly Sold:
Where the goods to be valued are captively consumed in one’s own factory, valuation will be done
on the basis of 110% of the cost of production of goods. If the goods are partially sold by the assessee
and partially captively consumed, the goods sold would be assessed on the basis of transaction value
under section 4 and the goods captively consumed would be valued under rule 8 i.e.110% of the cost
production of goods, states the Board’s circular no.643/32/2002-CE dt. 1-7-2002.
There can be situations where an assessee may manufacture an intermediate product (which is excisable)
which requires be processing or using for further production in another unit of the same manufacturer
located at a different place. In such a situation also, the principle of rule 8 is applicable. The cost of
production of good manufactured plus 10% thereof is to be adopted for determining the assessable value.
Valuation of Goods sold to related party:
Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 deals
with sale to related person. Related person has been defined in Section 4(3)(b) of the Excise Act (Refer
Annexure II). If a manufacturer sells goods to any of the related person, it will be treated as goods sold
to related person. Rule 9 specifies that the goods can be sold to related persons for two purposes, one
for onward sale when the related person is dealer/ distributor of the assessee and secondly the related
person buys goods from the assessee for consumption in the production or manufacture of articles. In
case, the related person does not sell the goods but uses or consumes such goods in the production
or manufacture of the articles, the value shall be determined in the manner specified in rule 8, i.e.
assessable value to be 110% of cost of production as per proviso to Rule 9.
Rule 10(a) of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000,also
provides that where excisable goods are sold to the related party/ inter connected undertaking who
does not sell the goods but uses or consumes such goods in the production or manufacture of articles,
the value of goods shall be determined in the manner specified in Rule 8 . The details of persons who
shall be deemed to be related are prescribed under Section 4(3) (Refer Annexure II).
Valuation of capital goods manufactured and captively consumed:
Capital goods manufactured in a factory and used within the factory of manufacturer for manufacture/
production of excisable goods, are exempt from payment of excise duty as per Notification No.67/1995-
CE dated 16th March,1995. This exemption is also available in case capital goods are manufactured by
third party in the factory of manufacturer.
Free sample
CBEC vide its circular No.643/34/2002 CX dated 1.7.2002 had clarified that for excisable goods removed
as free sample, provision of Rule 4 will not apply but excise duty will be paid on 110% of cost of production
as per Rule 8. However on reconsideration, the CBEC has modified the above circular. As per revised
circular No. 813/10/2005 CX dated 25.4.2005, value of free samples should be determined under Rule 4
of the Valuation Rules. The revised circular thus provides that valuation should be on the basis of value
of identical goods cleared at or around the same time. However, in case of new or improved product,
price of similar goods may not be available. Therefore for such goods, valuation should be on the
basis of cost of production plus 10%, under Rule 11 read with Rule 8, in the absence of any other mode
available for valuation.
Goods removed for test/trial outside the factory:
In above case Rule 4 is invoked as soon as assessee removes the manufactured goods for trial outside
the factory. Since similar goods have been sold, the assessable value will be determined based on
sale of such goods after making adjustment on account of difference in dates of delivery and the
specification of goods.
Definitions
The following terms are used in this guidance note with the meaning specified.
Cost of Production: Cost of production shall consist of Material Consumed, Direct Wages and Salaries,
Direct Expenses, Works Overheads, Quality Control cost, Research and Development Cost, Packing cost,
Administrative Overheads relating to production. To arrive at cost of production of goods dispatched
for captive consumption, adjustment for Stock of work-in-Process, finished goods, recoveries for sales
of scrap, wastage etc shall be made.
Captive consumption: Captive Consumption means the consumption of goods manufactured by one
division or unit and consumed by another division or unit of the same organization or related undertaking
for manufacturing another product(s).
Normal Capacity is the production achieved or achievable on an average over a period or season under
normal circumstances taking into account the loss of capacity resulting from planned maintenance.
(CAS-2)
Principles for Determination of cost of production for captive consumption
5.1 Material Consumed
Material Consumed shall include materials directly identified for production of goods such as:
(a) indigenous materials
(b) imported materials
(c) bought out items
(d) self manufactured items
(e) process materials and other items
Cost of material consumed shall consist of cost of material, duties and taxes, freight inwards, insurance,
and other expenditure directly attributable to procurement. Trade discount, rebates and other similar
items will be deducted for determining the cost of materials. Cenvat credit, credit for countervailing
customs duty, Sales Tax set off, VAT, duty draw back and other similar duties subsequently recovered/
recoverable by the enterprise shall also be deducted.
Various types of materials used for production of goods have been indicated. It depends on the type
of product and process of manufacture involved. For example for production of engineering product
both indigenous and imported raw materials may be used besides bought out items. In process industry,
it may be indigenous/imported raw materials and other item of materials.
Materials are also classified as direct material and indirect material. Direct materials identified to finished
product is a part of material cost while indirect material is part of overheads.
The cost elements to be considered for determining the cost of material consumed have been indicated
above. The cost of material should be measured at purchase price including duties and taxes, freight
inwards, insurance, and other expenditure directly attributable to procurement. (net of trade discounts,
rebates, taxes and duties refundable or to be credited by the taxing authorities) that can be quantified
with reasonable accuracy at the time of acquisition. The method of valuation of material consumed
shall be as per financial accounts, i.e., First in First out (FIFO) or weighted Average Rate.
LC charges/ Bank charges will not form part of material cost.
Normal loss or spoilage of material prior to reaching the factory will be absorbed in the cost of materials,
after reducing the amounts chargeable to suppliers and recovery as scrap. Losses due to shrinkage or
evaporation and gain due to elongation or absorption of moisture before the material is received will
be absorbed in material cost to the extent they are normal.
Records relating to of material cost such as purchase, receipt, storage, issued for manufacture, sales or
delivery of goods, including inputs and capital goods as the case may be, are required to be maintained
under the Central Excise Law besides excise records for daily production report, daily stock account,
CENVAT credit account for inputs, and the like . In brief it is to be ensured that there is effective material
management system, properly documented, correctly accounted for to arrive at quantity and cost
of material consumed for different types of products produced/manufactured. The item-wise material
consumption for major item is reconciled with financial account.
The cost of material consumed is determined with respect to (i) the source / type of material consumed,
and (ii) the method of valuation followed for issue of goods to production.
Any subsidy/grant/incentive and any such payment received /receivable with respect to any material
shall be reduced from the cost of material consumed.
In case raw material is imported through advance license/DEPB or under any other scheme and used
for manufacture of goods for captive consumption, adjustment for import duty shall be made to bring
the raw material cost to the level of duty paid import. However, Duty Drawback refund benefit shall
not be reduced from the input cost. Other export benefits like DEPB and DFRC will not be adjusted for
calculation of cost of production.
Any demurrage or detention charges or penalty levied by transport or other authorities shall not form
part of the cost of materials.
Bought out components:
Landed cost of indigenous / imported / bought out items shall be calculated on the above basis.
Illustrations of calculation of landed cost of indigenous and imported material are at Annexure VA and VB.
Self manufactured Items:
These will include any goods manufactured with raw material, indigenous or imported bought out material
etc. by the manufacturer in the same factory for further use in manufacture of final product. For this
purpose, the cost of production of such self manufactured items shall be considered as material cost
for the subsequent product, after considering inward freight, octroi, etc., as applicable. Intermediate
products/ goods transferred by another unit of the same manufacturer etc. shall be based on cost of
production as per CAS-4.
Process material, colour and chemicals, packing materials: The cost of these shall be calculated on
the same lines as above. In some cases, these items may get manufactured on job work basis from
outside parties. In such cases, cost should consist of the cost of material supplied plus job work charges/
processing charges paid to the job worker/processor. The incidental charges like freight, insurance,
handling charges etc, if any, shall also form cost of material.
In case of certain process materials like catalysts having longer process useful life, the cost of catalyst
should be spread over its useful life.
Quantity of Material consumed:
The quantity of material consumed is to be worked out from material issue records from stores for each
product. Such consumption in quantity may be derived by two methods.
Method (i): Based on actual issues for batch, unit or job - This method is preferred as it establishes direct
relationship of actual material usage for the product.
Method (ii): Based on any method other than actual e.g. Standard
Under this method material is issued at Standard Bill of material. The standard cost for each direct
material is defined at the beginning of the year. The variances from standard on account of price/
usage and the like are adjusted to consumption at the end of the period. Some organizations follow
“Back flush Costing “system for issue of material. As soon as a finished good is ready for stock, material
is back flushed (issued) as per the bill of material for that product. Any variation between the actual
issues (both quantity and value) and the standard as accumulated over the period is charged off to
consumption at the end of the period. Abnormal consumption, if any, shall not form part of material
consumption on products.
This method is to be used in case of goods, where the direct link of actual consumption for product is not
available. The manufacturer using this method should certify the quantitative requirement considered
for calculation of material consumption as per Bill of Material. It may be ensured that usage variance
is within reasonable limit and it should be adjusted in calculation of cost of production.
Reconciliation of cost of material consumed - It is advisable that cost of the material consumed for
working out cost of production is reconciled with financial books. For major direct materials, reconciliation
is to be ensured both in quantity and value.
5.2 Direct Wages and Salaries:
Direct wages and salaries shall include house rent allowance, overtime and incentive payments made
to employees directly engaged in the manufacturing activities.
Direct wages and salaries include fringe benefits such as:
I. Contribution to provident fund and ESIS
II. Bonus/ ex-gratia payment to employees
III. Provision for retirement benefits such as gratuity and superannuation
IV. Medical benefits
V. Subsidised food
VI. Leave with pay and holiday payment
VII. Leave encashment
VIII. Other allowances such as children’s education allowance, conveyance allowance which are
payable to employees in the normal course of business etc.
Direct wages and salaries are also termed as Employee cost. Employee cost are classified as direct
employees cost and indirect employees cost. Direct employee cost is assigned to or linked with a cost
centre or cost object. Indirect Employee Cost is treated as Overhead as dealt later.
Employee cost shall include the employee benefits as detailed above. If fringe benefits have not be
identified with relevant cost centre, these should be allocated in the ratio of direct salaries and wages
of the cost centres. Where an employee has worked in more than one departments/cost centres, it
may be assigned on the basis of time spent.
The manufacturer shall prepare a detailed statement indicating Direct Employee Cost to different
products and basis of allocation. Total Employee Cost shall be reconciled with financial accounts.
VRS payment, if any, shall not form part of cost of production.
5.3 Direct Expenses
Direct expenses are the expenses other than direct material cost and direct employee’s costs which
can be identified with the product.
Direct Expenses Include:
I. Cost of utilities such as fuel, power, water, steam, etc
II. Royalty based on production
III. Technical Assistance/ know –how fees
IV. Amortized cost of moulds, patterns, patents etc
V. Job charges
VI. Hire charges for tools and equipment
VII. Charges for a particular product designing etc.
Utilities include Power, water, steam, compressed air, Effluent Treatment etc. Some of the utilities are
generated within the plant and others are purchased from outside source. Actual cost of utilities should
be accumulated through utility cost centres and charged to user cost centres/departments on actual
or technical estimates. In case meters have been installed, allocation of power/steam shall be as per
actual reading. If any utility is supplied by a sister concern, the same shall be at landed cost. In case a
utility cannot be identified with a product or service cost centre, the same may be treated as part of
works overhead.
If a utility is partly produced and partly purchased, it shall be charged on weighted average rate.
A separate cost sheet for each of the utilities is to be prepared by the manufacturer. illustrations of
power and steam utilitiy cost sheet are given at Annexure VI and VII.
Royalty:
Royalty is payable either in relation to production or sales. If royalty payment is in respect of production
of the goods captively consumed, then the same should be added as the cost element. Royalty
for Marketing and Distribution, if paid, will be excluded from cost of production. Sometimes, royalty
payments are one time payment at the time factory is established and are identified with the plant
cost. It is capitalized and depreciated/ amortized with the plant cost.
Technical Assistance/Know-how fees:
Technical Assistance/know-how fees should be apportioned to products for which it is payable based
on the payment/ provision for the relevant period as per agreement with the supplier and its impact
shall be determined with reference to planned production.
Amortized cost of moulds, dies, patterns, designs, drawings etc.:
The cost of moulds, dies, patterns, patents etc should be apportioned to products for which such moulds,
patterns, patents are used which are directly identifiable with the products, based on the useful life of
the item.
Based on the representation received from foundry manufacturer, the department has clarified treatment
of pattern cost vide MF (DR) Circular No. 170/4/96-CX 1(F.No.6/14/94-CX 1) dated 23.1.1996 (Annexure
VIII) as under:
“the proportionate cost of pattern has to be included in the assessable value of the castings even in cases
where such patterns are being supplied by the buyers of the castings or are prepared / manufactured
by the job worker at the cost of the buyer. In cases where there is a difficulty in apportioning the cost of
pattern, apportionment can be made depending on the expected life and capability of the pattern and
the quantity of castings that can be manufactured from it and thus working the cost to be apportioned
per unit. For this purpose a certificate from a Cost Accountant may be accepted.”
Job / Processing charges:
Job Work Charges / Processing Charges which are directly identified or linked with the products will
form part of direct expenses.
Hire charges for tools and equipment:
Hire charges in respect of tools and equipments which can be directly identified with a particular product
will form part of direct expenses. Hire charges for tools and equipment for general use is in the nature
of indirect expenses and is to be included in works overheads.
Charges for a particular product designing etc:
Product design charges to the extent charged or amortized in the books of account in respect of tools and
equipments which can be directly identified with a particular product will form part of direct expenses.
5.4 Works Overheads:
Works overheads are the indirect costs incurred in the production process.
The term Works Overhead, Factory Overheads, Production Overheads and Manufacturing overheads
denote the same meaning and are used interchangeably. Works overheads shall include administration
cost relating to production, factory, works or manufacturing.
Works overheads include the following expenses:
I. Consumable stores and spares
II. Depreciation of plant and machinery, factory building etc.
III. Lease rent of production assets
IV. Repair and maintenance of plant and machinery, factory building etc
V. Indirect employees cost connected with production activities
VI. Drawing and Designing department cost.
VII. Insurance of plant and machinery, factory building, stock of raw material & WIP etc
VIII. Amortized cost of jigs, fixtures, tooling etc
IX. Service department cost such as Tool Room, Engineering & Maintenance, and Pollution Control
etc.
These expenses are incurred in the production process or in rendering service. These are used for a type
of cost that cannot be directly assigned to a cost centre or product, but can only be apportioned to
cost units/ cost object. Cost Accounting Standard 3, which deals with the methods of accumulation,
allocation, apportionment of overheads to different cost centres and absorption thereof to products
or services, should be followed.
A reconciliation statement showing the amount incurred under different heads of overheads and amount
absorbed by different products used for captive consumption and for sale should be prepared by the
assessee. The reconciliation will help in ensuring accuracy of cost statements.
List of items of expenses for works overheads, as indicated above, are illustrative and their treatment is
indicated below. Other expenses such as Security, dispensary, canteen, staff welfare and the like will
also form part of works overhead.
Consumable stores are items used in the maintenance of plant for example lubricant, cotton waste,
paint and the like. Spares are purchased items used for replacement of worn out part of machinery
and the like. Other indirect materials are items of small value such as bolt, nut nails, and the like which
cannot be directly identified economically with a product and are treated as indirect material. These
form part of the works overhead.
The depreciation on the fixed assets shall be as per the method of depreciation followed for the purpose
of financial accounts as per rates specified under Companies Act, 1956. Depreciation on idle fixed assets
shall be excluded from cost of production. Further, depreciation should not be calculated based on the
replacement value or notional value on revaluation of the assets. As per CAS-4 Depreciation of plant
and machinery, factory building and the like is part of works overhead.
Insurance premium for various assets and risk connected with production activity should be included in
works overheads. However, insurance on loss of profit policy and finished goods in transit policy should
not be part of works overhead. Lease rental on fixed asset shall be also considered under this head.
5.5 Quality Control Cost:
The quality control cost is the expenses incurred relating to quality control activities for adhering to
quality standard. These expenses shall include salaries & wages relating to employees engaged in
quality control activity and other related expenses.
Quality control cost shall include various costs related to Quality Control, Quality Assurance Department
functions and activities such as inspection of incoming material, inspection during progressive stages of
manufacture of product on completion of finished product, Testing, Analysis Charges, Fees / Charges
paid to IS / QS/Quality certification expenses etc. Expenses shall be identified under major heads such
as salaries and wages, ISO certification etc.
CAS-4 provides that the quality control cost is to be shown separately in the cost sheet.
5.6 Research and Development Cost:
The research and development cost incurred for development and improvement of the process or the
existing product shall be included in the cost of production.
Research and Development costs are the cost of undertaking research to improve quality of the present
product or improve process of manufacture, develop a new product, etc.
The R & D cost for the existing product/ process shall be included in the cost of production. In case the
company has followed a policy to treat a part of the R & D cost of existing product/process as deferred
cost, share applicable for the year/period will be included in cost of production.
R & D cost incurred for developing a new product should be excluded from calculation of cost of
production.
R&D cost is to be shown separately in the cost sheet as per Appendix I to CAS-4.
5.7 Administrative Overheads:
Administrative overheads need to be analyzed in relation to production activities and other activities.
Administrative overheads in relation to production activities shall be included in the cost of production.
Administrative overheads in relation to activities other than manufacturing activities e.g. marketing,
projects management, corporate office expenses etc. shall be excluded from the cost of production.
The role of administration is to facilitate the manufacturing, general policy making and marketing
activities. The administrative overheads shall be included in the cost of production only to the extent they
are attributable to the factory. Administrative overheads in relation to activities other than manufacturing
activities e.g. marketing, selling, depot/branches etc. shall be excluded from the cost of production.
Administrative Overheads for production may include share from:
• Salaries of staff for administrative and other departments relating to production such as Accounts,
Purchase, HRD, Production Planning, Security etc.
• General office expenses - like rent, lighting, rates & taxes, telephone, stationery, postage etc.
• Depreciation of office building, office equipment, furniture, vehicles, etc
• Repairs & Maintenance of office building, office equipment, furniture, vehicles, etc.
• Legal expenses in relation to factory.
Treatment of Head Office/Corporate Office Expenses:
A company may have a number of factories with a head office. In a multi-locational/ multi-product
company, there are common activities carried out at Head Office like purchase, inventory management,
finance, personnel, R & D, Quality Assurance, security etc. These activities sometimes, are centralized
at one place i.e. Head Office for business convenience and scale of economy and booked as head
office expenses along with other activities like secretarial, project, treasury, investment, trading, etc.
They do not form part of the Administration overheads. For example: Industrial relation Department;
Material management; Operation/production planning Department; Human Resources, System Design
& Development Set Up and the like are production related activities. Nomenclature or place where
the activity takes place is not relevant. In such a situation, activities at Head Office/Corporate level
are to be clearly demarcated and segregated so as to distinguish activities that contribute clearly and
directly to production activities from general management and administration activities. It is necessary
to properly analyze the expenses of such activities of head office and allocate these to plants/products
on rational basis.
Freight and forwarding charges on dispatch of goods for captive consumption:
In case goods for captive consumption are dispatched from one factory premises to another factory
premises, the cost of transportation incurred by sender of the goods is to be treated as cost of
transportation under Rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods)
Rules, 2000, hence excluded from calculation of cost of production for CAS.
5.8 Packing Cost:
If product is transferred/dispatched duly packed for captive consumption, cost of such packing shall
be included.
Packing cost includes both cost of primary and secondary packing required for transfer/dispatch of the
goods used for captive consumption.
Packing Cost includes:
I. Cost of Packing Material used
II. Job charges paid for manufacture of packing material, if any.
III. Packing charges including salaries & wages of the persons involved in packing activity.
IV. Other expenses relating to packing activity.
Landed cost of the packing material should be calculated as per the guidelines given in para related
to material cost. If product for captive consumption is transferred without packing (unpacked), packing
cost need not be included in the cost of production. In case, captive product is transferred on returnable/
durable packing container, pro-rata cost shall be estimated and charged based on the life of the
container. In case packed goods are sent to job worker, the cost of packing will form part of cost of
production, unless these are returned to buyer for re-use.
Packing cost includes both cost of primary and secondary packing required for transfer/ dispatch of
the goods used for captive consumption.
5.9 Absorption of overheads:
Overheads shall be analyzed into variable overheads and fixed overheads.
Variable Overheads are the items which change with the change in volume of production, such as cost
of utilities etc.
Fixed overheads are the items whose value do not change with the change in volume of production
such as staff salaries, rent etc.
The variable production overheads shall be absorbed in production cost based on actual capacity
utilization.
The fixed production overheads and other similar items of fixed costs such as quality control cost,
research and development costs, administrative overheads relating to manufacturing shall be absorbed
in the production cost on the basis of the normal capacity or actual capacity utilization of the plant,
whichever is higher.
Absorption of overheads:
Based on behaviour, overheads are classified as variable overhead and fixed overhead. Variable
Overheads comprise of expenses which vary in proportion to the change in the volume of production
e.g. cost of utilities, royalty, job charges, etc.
Fixed overheads comprise of expenses which do not vary with the change in volume of production such
as of rent, insurance, technical assistance/know-how fees, amortized cost of moulds, patterns, patents,
hire charges for tools and equipments, charges for a particular design, and the like.
The principles laid down in CAS-3, relating to the methods of accumulation, allocation, apportionment
of overheads to different cost centers and absorption thereof to products or services on a consistent
and uniform basis in the preparation of cost sheet should be followed for the purpose of allocation and
absorption of overheads.
utilization. The fixed production overheads shall be absorbed on normal capacity basis or actual capacity
utilization whichever is higher. Normal Capacity is the production achieved or achievable on an average
over a period or season under normal circumstances taking into account the loss of capacity resulting
from planned maintenance. Normal capacity for a defined period is the practical capacity minus the
loss of productive capacity due to external factors. Whereas Practical or Achievable capacity as “the
maximum productive capacity of a plant reduced by the predictable and unavoidable factors of
interruption pertaining to internal causes such as inevitable interruptions due to time lost for preventive
maintenance, repairs, set ups, normal delays, weekly off days and holidays etc.
An illustration on absorption of overheads based on normal capacity utilisation is at Annexure IX.
A reconciliation statement showing the amount incurred under different heads of overheads and
amount absorbed by different products should be prepared for this purpose. The reconciliation will help
in ensuring accuracy of cost of production in cost statements.
5.10 Valuation of Stock of work-in-progress and finished goods
Stock of work-in-progress shall be valued at cost on the basis of stages of completion as per the cost
accounting principles. Similarly, stock of finished goods shall be valued at cost. Opening and closing
stock of work-in-progress shall be adjusted for calculation of cost of goods produced and similarly
opening and closing stock of finished goods shall be adjusted for calculation of goods dispatched.
For determining the cost of production for captive consumption, adjustment for opening and closing
stock of work-in-progress shall be made. The valuation of opening stock and closing stock of WIP is
valued at cost on the basis of stages of completion. Similarly for calculation of cost of finished goods
dispatched, adjustment for opening and closing stock of finished goods, if any, is to be made. In case
the cost of a shorter period is to be determined, where the figures of opening and closing stock are not
readily available, the adjustment of figures of opening and closing stock may be ignored.
Adjustment of opening and closing stock of WIP/finished goods will arise only when the cost of production
is to be determined for historical cost and due consideration shall be given for above adjustment in
determining the cost of production. However, if cost of production is to be determined for a future
period, it will be based on projected cost and projected capacity utilisation. In such cases, adjustment
of opening and closing WIP/finished goods and valuation thereof does not arise.
5.11 Treatment of Joint Products and By-Products
A production process may result in more than one product being produced simultaneously. In case joint
products are produced, joint costs are allocated between the products on a rational and consistent
basis. In case by-products are produced, the net realisable value of by-products is credited to the cost
of production of the main product.
For allocation of joint cost to joint products, the sales values of products at the split off point i.e. when the
products become separately identifiable may be the basis. It may be allocated based on a measure
of the number of units, weight or volume. Some other basis may be adopted. For example, in case of
petroleum products, each product is assigned certain value based on its certain properties, may be
calorific value and these values become the basis of apportionment of joint cost among petroleum
products.
The joint cost shall be allocated to the cost of production of Joint Products as per the generally accepted
cost accounting principles.
By-product:
By product is a product recovered incidentally from the material used in the manufacture of main
products. It has lower importance compared to the main product(s).It is difficult to determine the cost
of by-product. By products are sold:
(1) Either In original form without further processing; or
(2) or processed in order to be saleable. In such case, the main product is credited with the sale
realization (gross/net) as the case may be. In other words expenses incurred to bring by-product
to marketable conditions shall be adjusted from the sale of by product and net realizable value of
by-product shall be credited to cost of production of main product.
In case sale realization is not available, credit to main product at substitute value of by product may
be given.
5.12 Treatment of Scrap and Waste:
The production process may generate scrap or waste. Realized or realizable value of scrap or waste
shall be credited to the cost of production.
In case, scrap or waste does not have ready market and it is used for reprocessing, the scrap or waste
value shall be taken at a rate of input cost depending upon the stage at which such scrap or waste is
recycled. The expenses incurred for making the scrap suitable for reprocessing shall be deducted from
value of scrap or waste.
5.13 Miscellaneous Income:
Miscellaneous income relating to production shall be adjusted in the calculation of cost of production,
for example income from sale of empty containers used for dispatch of the captively consumed goods
produced under reference.
The miscellaneous income needs to be analyzed in detail for its nature (capital / revenue) and if not
related to production activities, the same may be ignored. The income arising out of sale of used empty
containers of the input materials shall be adjusted in the cost of production.
5.14 Inputs received free of cost:
In case any input material, whether of direct or indirect nature, including packing material is supplied
free of cost by the user of the captive product, the landed cost of such material shall be included in
the cost of production.
Landed cost of inputs received free of cost should be calculated as per the guidelines given in para
related to material cost. The cost of inputs received free of cost shall be included in the cost of production
for captive consumption.
5.15 Moulds, Tools, Dies & Patterns etc received free of cost:
The amortization cost of such items shall be included in the cost of production.
Amortization should be done on the basis of estimated production that can be achieved during the life
of the Mould, Tool, Die or Pattern. After the estimated life, if the moulds, dies are still in use and if the full
cost has already been amortized, then amortization cost need not be considered for the purpose of
cost of production. However, for this purpose, proper record needs to be maintained. The estimated life
/ estimated production may be certified by technical person. Where the dies, moulds etc are supplied
by the customer, the necessary details may be obtained from the customer.
In case of dies, moulds etc purchased / manufactured in-house, its cost should be ascertained and
amortised over its useful life.
5.16 Interest and Financial Charges:
Interest and financial charges being a financial charge shall not be considered to be a part of cost of
production.
Interest and financial charges can be on bank borrowings, amortization of discounts or premium related
to borrowings, amortization of ancillary cost incurred in connection with the arrangements of borrowings,
finance charges in respect of finance leases and exchange differences arising from foreign currency
borrowings to the extent they are regarded as an adjustment to the interest costs.
Interest and financial charges are finance cost and do not form part of cost of production for captive
consumption. Logic for excluding interest from captive consumption is that for purpose of assessable value
a margin of 10% of cost of production is added to take care of return on capital employed. (Normally
return on capital employed takes care of return on owners’ equity and interest on borrowed fund). To
make the calculation simple above approach of 110% of cost of production of captively consumed
good is taken as assessable value.
5.17 Abnormal and Non-recurring Cost
Abnormal and non-recurring cost arises due to unusual or unexpected occurrence of events, such as
heavy break down of plants, accident, market condition restricting sales below normal level, abnormal
idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment
compensation, lay-off wages etc. The abnormal cost shall not form the part of cost of production.
Loss due to fire, natural calamities and the like (as indicated above) are treated as abnormal and
non-recurring cost, and excluded from cost of production. Further, expenses which are not related
to manufacturing activity and which do not form part of the cost as per the generally accepted cost
accounting principles may be excluded for this purpose e.g. - donations, loss on sale of fixed assets, etc.
The Council of the Institute of Cost and Works Accountants of India has issued the Cost Accounting
Standard 4 (CAS-4) for Determination of Cost of Production for Captive Consumption. This standard lays
down the principles and methods for determining the cost of production of excisable goods used for
captive consumption, presentation and disclosure in the cost sheet.
This Guidance Note deals with the principles and methods as provided in CAS-4 and practical aspects
in connection with the determination of cost of production of excisable goods used for captive
consumption.
In the preparation of cost sheet including those requiring attestation, cost of production of excisable
goods used for captive consumption shall be determined as per CAS-4. The Cost Accounting Standards
have been set in bold italic type and reference number has been retained as in CAS-4 for ready
reference.
CAS 4 refers to Central Excise Act and Rules framed there under for determination of assessable value
of goods used for captive consumption. Therefore, this Guidance note refers to relevant sections of
Central Excise Act,1944, Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000,
other relevant rules thereto, case laws on the subject and provides methodology for determination
of assessable value of captively consumed goods on cost construction method as a measure of
simplification.
Circular No. 692/08/2003-CX dated 13th February, 2003 issued by Department of Revenue (CBEC) inter
alia provides “that for valuing goods which are captively consumed, the general principles of costing
would be adopted for applying Rule 8. The Board has interacted with the Institute of Cost & Works
Accountants of India (ICWAI) for developing costing standards for costing of captively consumed
goods.” Paragraph 3 of the above circular further provides:
“cost of production of captively consumed goods will henceforth be done strictly in accordance with
CAS-4…..”
The above circular is reproduced as Annexure I.
In view of above, CAS-4 is applicable from 13th February, 2003. The Department has, however, clarified
that though CAS-4 was approved by the Government of India on 13.2.2003, cases pending finalization
for the period earlier to this may be considered in line with costing principles laid down in CAS-4, issued
by the Institute of Cost and Works Accountants of India. Assessments finalized prior to 13th February,
2003 not to be opened.
CAS-4 applies to following type of organizations registered with Excise Department if goods manufactured
are for captive consumption:
1. Proprietorship concern
2. Partnership Firms
3. Cooperative Societies
4. Private/Public Limited Companies.
SSI units registered with Excise Department are exempt from payment of excise duty as per registration
conditions.
Introduction
The scheme of valuation of excisable goods is contained in Sec. 3A, Sec. 4 and Sec. 4A of the Central
Excise Act, 1944. The goods manufactured have to be valued in a prescribed manner as per above
provisions to determine the excise duty payable by the assessee. Section 3 provides that excise duties
shall be levied and collected on all excisable goods which are produced or manufactured in India at
the rates set forth in Schedule to the Central Excise Tariff Act, 1985. Section 4 provides the mechanism to
determine the value of goods subject to duty for the purpose of assessment. Section 4 was replaced by
new Section 4 w.e.f 1-07-2000 and concept of ‘transaction value’ has been introduced under Section
4(3)(d). Section 4A provides for valuation of excisable goods with reference to retail sale price and
applicable to commodities as notified by the Government from time to time and on which retail price
is required to be indicated under the provision of the Standard of Weights & Measures Act, 1976 and
the Rules made there under.
Section 4(1) (a) of Central Excise Act, 1944 deals with the Valuation of excisable goods when following
requirements are satisfied:
1. Goods are sold at the time and place of removal from factory/warehouse;
2. The assessee and the buyer of the goods are not related; and
3. The price is the sole consideration of sale.
Each transaction is treated as a separate transaction for valuation purposes.
If any one of the above requirements is not satisfied, assessable value shall be determined under the
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 notified on 30.6.2000, as
provided under Section 4(1)(b) of the Act. For ready reference extract of Section 4 of the Central Excise
Act, 1944 and the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 are
annexed as Annexure II and III. Rules 8 and 9 deal with the valuation of goods captively consumed.
Meaning of Captive Consumption:
“Captive Consumption” means that the goods are not sold by the assessee but are used for consumption
by him or on his behalf in the production or manufacture of other articles in the same premises or
elsewhere.
When goods manufactured are supplied to a related party who does not sell the goods but consumes the
same in manufacture of another product(s), such goods are also deemed to be “captively consumed”
for the purpose of valuation under Excise Laws.
In some cases during the manufacture, certain intermediate goods emerge and are used in
manufacture/production of other goods. The use of such intermediate product within the factory is also
termed as “Captive Consumption”.
Sometimes the goods are not removed from the factory but are used in the further manufacture/
production of goods and in such cases also, duty is payable as soon as the goods are manufactured/
produced within the factory unless exempted. Goods captively consumed in the same factory of the
manufacturer are exempted from duty as per Notification No. 67/95-CE dt.16.03.1995, if duty is payable
on the final product. For example, the manufacturer of motor vehicles manufactures various parts of
the motor vehicles like brakes, panels etc. These parts are also excisable goods and have separate
entry in the schedule to Central Excise Tariff Act, 1985. If these parts are removed from the factory, duty
is payable but if these parts are used in the same factory of the manufacturer in the assembly / further
manufacture of motor vehicles then the use of parts and components is called as captive consumption,
and is not subject to excise duty in view of above notification.
Type of Goods:
Following type of goods are covered under CAS-4:
1. Goods manufactured not sold but captively consumed
2. Goods manufactured partly sold and partly captively consumed
3. Goods manufactured sold to related party for captive consumption
Goods manufactured, not sold but captively consumed:
Rule 8 of the Central Excise Valuation Rules provides that where the excisable goods are not sold but
are used for consumption by assessee or on his behalf in the production or manufacture of other articles,
the value shall be 110% (as of now)of the cost of production or manufacture of such goods. (115% was
substituted by 110% vide notification no. 60 / 2003 – CE (NT) dated 05-08-2003) In other words, when
goods are captively consumed, the assessable value will be 110% of cost of production. The earlier
concept of deemed profit / notional profit has been done away and margin of 10% by way of profit etc
is prescribed in the rule itself for ease of assessment of goods used for captive consumption. The cost of
production is to be determined as per CAS-4 vide Government of India, Ministry of Finance & Company
Affairs (Department of Revenue’s Circular dated 13th February, 2003 (refer Annexure I)).
Judgement of Supreme Court dated 1.8.2006 :
In a landmark judgment dated 1.8.2006 in case No. Appeal (civil)2947-2948 of 2001 Commissioner of
Central Excise, Pune vs M/s Cadbury India Ltd.(Refer Annexure IV), Hon’ble Supreme Court of India,
observed :
“the Institute of Cost and Works Accountants of India (ICWAI) has laid down the principles of determining
cost of production for captive consumption and formulated the standards for costing: CAS-4. According
to CAS-4 the definition of “cost of production” is as under:
“4.1 Cost of Production : Cost of Production shall consist of Material consumed, Direct wages and salaries,
Direct expenses, Works overheads, Quality Control cost, Research and Development cost, Packing cost,
Administrative Overheads relating to production.”
“The cost accounting principles laid down by ICWAI have been recognized by the Central Board of Excise
and Customs vide Circular No.692/8/2003 CX dated 13.2.2003. The circular requires the department to
determine the cost of production of captively consumed goods strictly in accordance with CAS-4. “
The Tribunal in the case of BMF BELTINGS LTD. vs. CCE : 2005 (184) E.L.T. 158 (Tri. Bang.) for the period
1995 to 2000 has directed the department to apply CAS-4 for the determination of the cost of production
of the captively consumed goods. In ITC vs. CCE (190) ELT 119 the Tribunal held that the department
has to calculate the cost of production in terms of CAS-4. Other decisions of the Tribunal, wherein it
has directed that CAS-4 be applied for determination of the cost of production, are Teja Engineering
v/s CCE 2006 (193) ELT 100 (Tri-Chennai), Ashima Denims v/s CCE 2005 (191) ELT 318 (Tri-Mumbai), and
Arti Industries vs. CCE 2005 (186) ELT 208 (Tri-Chennai). This is therefore a consistent view taken by the
Tribunal. The department has not filed any appeal in these cases and accepted the legal position. Apart
from this, in the light of several decisions of this Court, the Department is also bound by the said circular
No.692/9/2003 CX dated 13th February,2003 issued by the CBEC.”
In view of the above judgement also,the cost of production for captively consumed goods is to be
determined as per CAS-4.
Valuation of Goods Partly Captively Consumed And Partly Sold:
Where the goods to be valued are captively consumed in one’s own factory, valuation will be done
on the basis of 110% of the cost of production of goods. If the goods are partially sold by the assessee
and partially captively consumed, the goods sold would be assessed on the basis of transaction value
under section 4 and the goods captively consumed would be valued under rule 8 i.e.110% of the cost
production of goods, states the Board’s circular no.643/32/2002-CE dt. 1-7-2002.
There can be situations where an assessee may manufacture an intermediate product (which is excisable)
which requires be processing or using for further production in another unit of the same manufacturer
located at a different place. In such a situation also, the principle of rule 8 is applicable. The cost of
production of good manufactured plus 10% thereof is to be adopted for determining the assessable value.
Valuation of Goods sold to related party:
Rule 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 deals
with sale to related person. Related person has been defined in Section 4(3)(b) of the Excise Act (Refer
Annexure II). If a manufacturer sells goods to any of the related person, it will be treated as goods sold
to related person. Rule 9 specifies that the goods can be sold to related persons for two purposes, one
for onward sale when the related person is dealer/ distributor of the assessee and secondly the related
person buys goods from the assessee for consumption in the production or manufacture of articles. In
case, the related person does not sell the goods but uses or consumes such goods in the production
or manufacture of the articles, the value shall be determined in the manner specified in rule 8, i.e.
assessable value to be 110% of cost of production as per proviso to Rule 9.
Rule 10(a) of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000,also
provides that where excisable goods are sold to the related party/ inter connected undertaking who
does not sell the goods but uses or consumes such goods in the production or manufacture of articles,
the value of goods shall be determined in the manner specified in Rule 8 . The details of persons who
shall be deemed to be related are prescribed under Section 4(3) (Refer Annexure II).
Valuation of capital goods manufactured and captively consumed:
Capital goods manufactured in a factory and used within the factory of manufacturer for manufacture/
production of excisable goods, are exempt from payment of excise duty as per Notification No.67/1995-
CE dated 16th March,1995. This exemption is also available in case capital goods are manufactured by
third party in the factory of manufacturer.
Free sample
CBEC vide its circular No.643/34/2002 CX dated 1.7.2002 had clarified that for excisable goods removed
as free sample, provision of Rule 4 will not apply but excise duty will be paid on 110% of cost of production
as per Rule 8. However on reconsideration, the CBEC has modified the above circular. As per revised
circular No. 813/10/2005 CX dated 25.4.2005, value of free samples should be determined under Rule 4
of the Valuation Rules. The revised circular thus provides that valuation should be on the basis of value
of identical goods cleared at or around the same time. However, in case of new or improved product,
price of similar goods may not be available. Therefore for such goods, valuation should be on the
basis of cost of production plus 10%, under Rule 11 read with Rule 8, in the absence of any other mode
available for valuation.
Goods removed for test/trial outside the factory:
In above case Rule 4 is invoked as soon as assessee removes the manufactured goods for trial outside
the factory. Since similar goods have been sold, the assessable value will be determined based on
sale of such goods after making adjustment on account of difference in dates of delivery and the
specification of goods.
Definitions
The following terms are used in this guidance note with the meaning specified.
Cost of Production: Cost of production shall consist of Material Consumed, Direct Wages and Salaries,
Direct Expenses, Works Overheads, Quality Control cost, Research and Development Cost, Packing cost,
Administrative Overheads relating to production. To arrive at cost of production of goods dispatched
for captive consumption, adjustment for Stock of work-in-Process, finished goods, recoveries for sales
of scrap, wastage etc shall be made.
Captive consumption: Captive Consumption means the consumption of goods manufactured by one
division or unit and consumed by another division or unit of the same organization or related undertaking
for manufacturing another product(s).
Normal Capacity is the production achieved or achievable on an average over a period or season under
normal circumstances taking into account the loss of capacity resulting from planned maintenance.
(CAS-2)
Principles for Determination of cost of production for captive consumption
5.1 Material Consumed
Material Consumed shall include materials directly identified for production of goods such as:
(a) indigenous materials
(b) imported materials
(c) bought out items
(d) self manufactured items
(e) process materials and other items
Cost of material consumed shall consist of cost of material, duties and taxes, freight inwards, insurance,
and other expenditure directly attributable to procurement. Trade discount, rebates and other similar
items will be deducted for determining the cost of materials. Cenvat credit, credit for countervailing
customs duty, Sales Tax set off, VAT, duty draw back and other similar duties subsequently recovered/
recoverable by the enterprise shall also be deducted.
Various types of materials used for production of goods have been indicated. It depends on the type
of product and process of manufacture involved. For example for production of engineering product
both indigenous and imported raw materials may be used besides bought out items. In process industry,
it may be indigenous/imported raw materials and other item of materials.
Materials are also classified as direct material and indirect material. Direct materials identified to finished
product is a part of material cost while indirect material is part of overheads.
The cost elements to be considered for determining the cost of material consumed have been indicated
above. The cost of material should be measured at purchase price including duties and taxes, freight
inwards, insurance, and other expenditure directly attributable to procurement. (net of trade discounts,
rebates, taxes and duties refundable or to be credited by the taxing authorities) that can be quantified
with reasonable accuracy at the time of acquisition. The method of valuation of material consumed
shall be as per financial accounts, i.e., First in First out (FIFO) or weighted Average Rate.
LC charges/ Bank charges will not form part of material cost.
Normal loss or spoilage of material prior to reaching the factory will be absorbed in the cost of materials,
after reducing the amounts chargeable to suppliers and recovery as scrap. Losses due to shrinkage or
evaporation and gain due to elongation or absorption of moisture before the material is received will
be absorbed in material cost to the extent they are normal.
Records relating to of material cost such as purchase, receipt, storage, issued for manufacture, sales or
delivery of goods, including inputs and capital goods as the case may be, are required to be maintained
under the Central Excise Law besides excise records for daily production report, daily stock account,
CENVAT credit account for inputs, and the like . In brief it is to be ensured that there is effective material
management system, properly documented, correctly accounted for to arrive at quantity and cost
of material consumed for different types of products produced/manufactured. The item-wise material
consumption for major item is reconciled with financial account.
The cost of material consumed is determined with respect to (i) the source / type of material consumed,
and (ii) the method of valuation followed for issue of goods to production.
Any subsidy/grant/incentive and any such payment received /receivable with respect to any material
shall be reduced from the cost of material consumed.
In case raw material is imported through advance license/DEPB or under any other scheme and used
for manufacture of goods for captive consumption, adjustment for import duty shall be made to bring
the raw material cost to the level of duty paid import. However, Duty Drawback refund benefit shall
not be reduced from the input cost. Other export benefits like DEPB and DFRC will not be adjusted for
calculation of cost of production.
Any demurrage or detention charges or penalty levied by transport or other authorities shall not form
part of the cost of materials.
Bought out components:
Landed cost of indigenous / imported / bought out items shall be calculated on the above basis.
Illustrations of calculation of landed cost of indigenous and imported material are at Annexure VA and VB.
Self manufactured Items:
These will include any goods manufactured with raw material, indigenous or imported bought out material
etc. by the manufacturer in the same factory for further use in manufacture of final product. For this
purpose, the cost of production of such self manufactured items shall be considered as material cost
for the subsequent product, after considering inward freight, octroi, etc., as applicable. Intermediate
products/ goods transferred by another unit of the same manufacturer etc. shall be based on cost of
production as per CAS-4.
Process material, colour and chemicals, packing materials: The cost of these shall be calculated on
the same lines as above. In some cases, these items may get manufactured on job work basis from
outside parties. In such cases, cost should consist of the cost of material supplied plus job work charges/
processing charges paid to the job worker/processor. The incidental charges like freight, insurance,
handling charges etc, if any, shall also form cost of material.
In case of certain process materials like catalysts having longer process useful life, the cost of catalyst
should be spread over its useful life.
Quantity of Material consumed:
The quantity of material consumed is to be worked out from material issue records from stores for each
product. Such consumption in quantity may be derived by two methods.
Method (i): Based on actual issues for batch, unit or job - This method is preferred as it establishes direct
relationship of actual material usage for the product.
Method (ii): Based on any method other than actual e.g. Standard
Under this method material is issued at Standard Bill of material. The standard cost for each direct
material is defined at the beginning of the year. The variances from standard on account of price/
usage and the like are adjusted to consumption at the end of the period. Some organizations follow
“Back flush Costing “system for issue of material. As soon as a finished good is ready for stock, material
is back flushed (issued) as per the bill of material for that product. Any variation between the actual
issues (both quantity and value) and the standard as accumulated over the period is charged off to
consumption at the end of the period. Abnormal consumption, if any, shall not form part of material
consumption on products.
This method is to be used in case of goods, where the direct link of actual consumption for product is not
available. The manufacturer using this method should certify the quantitative requirement considered
for calculation of material consumption as per Bill of Material. It may be ensured that usage variance
is within reasonable limit and it should be adjusted in calculation of cost of production.
Reconciliation of cost of material consumed - It is advisable that cost of the material consumed for
working out cost of production is reconciled with financial books. For major direct materials, reconciliation
is to be ensured both in quantity and value.
5.2 Direct Wages and Salaries:
Direct wages and salaries shall include house rent allowance, overtime and incentive payments made
to employees directly engaged in the manufacturing activities.
Direct wages and salaries include fringe benefits such as:
I. Contribution to provident fund and ESIS
II. Bonus/ ex-gratia payment to employees
III. Provision for retirement benefits such as gratuity and superannuation
IV. Medical benefits
V. Subsidised food
VI. Leave with pay and holiday payment
VII. Leave encashment
VIII. Other allowances such as children’s education allowance, conveyance allowance which are
payable to employees in the normal course of business etc.
Direct wages and salaries are also termed as Employee cost. Employee cost are classified as direct
employees cost and indirect employees cost. Direct employee cost is assigned to or linked with a cost
centre or cost object. Indirect Employee Cost is treated as Overhead as dealt later.
Employee cost shall include the employee benefits as detailed above. If fringe benefits have not be
identified with relevant cost centre, these should be allocated in the ratio of direct salaries and wages
of the cost centres. Where an employee has worked in more than one departments/cost centres, it
may be assigned on the basis of time spent.
The manufacturer shall prepare a detailed statement indicating Direct Employee Cost to different
products and basis of allocation. Total Employee Cost shall be reconciled with financial accounts.
VRS payment, if any, shall not form part of cost of production.
5.3 Direct Expenses
Direct expenses are the expenses other than direct material cost and direct employee’s costs which
can be identified with the product.
Direct Expenses Include:
I. Cost of utilities such as fuel, power, water, steam, etc
II. Royalty based on production
III. Technical Assistance/ know –how fees
IV. Amortized cost of moulds, patterns, patents etc
V. Job charges
VI. Hire charges for tools and equipment
VII. Charges for a particular product designing etc.
Utilities include Power, water, steam, compressed air, Effluent Treatment etc. Some of the utilities are
generated within the plant and others are purchased from outside source. Actual cost of utilities should
be accumulated through utility cost centres and charged to user cost centres/departments on actual
or technical estimates. In case meters have been installed, allocation of power/steam shall be as per
actual reading. If any utility is supplied by a sister concern, the same shall be at landed cost. In case a
utility cannot be identified with a product or service cost centre, the same may be treated as part of
works overhead.
If a utility is partly produced and partly purchased, it shall be charged on weighted average rate.
A separate cost sheet for each of the utilities is to be prepared by the manufacturer. illustrations of
power and steam utilitiy cost sheet are given at Annexure VI and VII.
Royalty:
Royalty is payable either in relation to production or sales. If royalty payment is in respect of production
of the goods captively consumed, then the same should be added as the cost element. Royalty
for Marketing and Distribution, if paid, will be excluded from cost of production. Sometimes, royalty
payments are one time payment at the time factory is established and are identified with the plant
cost. It is capitalized and depreciated/ amortized with the plant cost.
Technical Assistance/Know-how fees:
Technical Assistance/know-how fees should be apportioned to products for which it is payable based
on the payment/ provision for the relevant period as per agreement with the supplier and its impact
shall be determined with reference to planned production.
Amortized cost of moulds, dies, patterns, designs, drawings etc.:
The cost of moulds, dies, patterns, patents etc should be apportioned to products for which such moulds,
patterns, patents are used which are directly identifiable with the products, based on the useful life of
the item.
Based on the representation received from foundry manufacturer, the department has clarified treatment
of pattern cost vide MF (DR) Circular No. 170/4/96-CX 1(F.No.6/14/94-CX 1) dated 23.1.1996 (Annexure
VIII) as under:
“the proportionate cost of pattern has to be included in the assessable value of the castings even in cases
where such patterns are being supplied by the buyers of the castings or are prepared / manufactured
by the job worker at the cost of the buyer. In cases where there is a difficulty in apportioning the cost of
pattern, apportionment can be made depending on the expected life and capability of the pattern and
the quantity of castings that can be manufactured from it and thus working the cost to be apportioned
per unit. For this purpose a certificate from a Cost Accountant may be accepted.”
Job / Processing charges:
Job Work Charges / Processing Charges which are directly identified or linked with the products will
form part of direct expenses.
Hire charges for tools and equipment:
Hire charges in respect of tools and equipments which can be directly identified with a particular product
will form part of direct expenses. Hire charges for tools and equipment for general use is in the nature
of indirect expenses and is to be included in works overheads.
Charges for a particular product designing etc:
Product design charges to the extent charged or amortized in the books of account in respect of tools and
equipments which can be directly identified with a particular product will form part of direct expenses.
5.4 Works Overheads:
Works overheads are the indirect costs incurred in the production process.
The term Works Overhead, Factory Overheads, Production Overheads and Manufacturing overheads
denote the same meaning and are used interchangeably. Works overheads shall include administration
cost relating to production, factory, works or manufacturing.
Works overheads include the following expenses:
I. Consumable stores and spares
II. Depreciation of plant and machinery, factory building etc.
III. Lease rent of production assets
IV. Repair and maintenance of plant and machinery, factory building etc
V. Indirect employees cost connected with production activities
VI. Drawing and Designing department cost.
VII. Insurance of plant and machinery, factory building, stock of raw material & WIP etc
VIII. Amortized cost of jigs, fixtures, tooling etc
IX. Service department cost such as Tool Room, Engineering & Maintenance, and Pollution Control
etc.
These expenses are incurred in the production process or in rendering service. These are used for a type
of cost that cannot be directly assigned to a cost centre or product, but can only be apportioned to
cost units/ cost object. Cost Accounting Standard 3, which deals with the methods of accumulation,
allocation, apportionment of overheads to different cost centres and absorption thereof to products
or services, should be followed.
A reconciliation statement showing the amount incurred under different heads of overheads and amount
absorbed by different products used for captive consumption and for sale should be prepared by the
assessee. The reconciliation will help in ensuring accuracy of cost statements.
List of items of expenses for works overheads, as indicated above, are illustrative and their treatment is
indicated below. Other expenses such as Security, dispensary, canteen, staff welfare and the like will
also form part of works overhead.
Consumable stores are items used in the maintenance of plant for example lubricant, cotton waste,
paint and the like. Spares are purchased items used for replacement of worn out part of machinery
and the like. Other indirect materials are items of small value such as bolt, nut nails, and the like which
cannot be directly identified economically with a product and are treated as indirect material. These
form part of the works overhead.
The depreciation on the fixed assets shall be as per the method of depreciation followed for the purpose
of financial accounts as per rates specified under Companies Act, 1956. Depreciation on idle fixed assets
shall be excluded from cost of production. Further, depreciation should not be calculated based on the
replacement value or notional value on revaluation of the assets. As per CAS-4 Depreciation of plant
and machinery, factory building and the like is part of works overhead.
Insurance premium for various assets and risk connected with production activity should be included in
works overheads. However, insurance on loss of profit policy and finished goods in transit policy should
not be part of works overhead. Lease rental on fixed asset shall be also considered under this head.
5.5 Quality Control Cost:
The quality control cost is the expenses incurred relating to quality control activities for adhering to
quality standard. These expenses shall include salaries & wages relating to employees engaged in
quality control activity and other related expenses.
Quality control cost shall include various costs related to Quality Control, Quality Assurance Department
functions and activities such as inspection of incoming material, inspection during progressive stages of
manufacture of product on completion of finished product, Testing, Analysis Charges, Fees / Charges
paid to IS / QS/Quality certification expenses etc. Expenses shall be identified under major heads such
as salaries and wages, ISO certification etc.
CAS-4 provides that the quality control cost is to be shown separately in the cost sheet.
5.6 Research and Development Cost:
The research and development cost incurred for development and improvement of the process or the
existing product shall be included in the cost of production.
Research and Development costs are the cost of undertaking research to improve quality of the present
product or improve process of manufacture, develop a new product, etc.
The R & D cost for the existing product/ process shall be included in the cost of production. In case the
company has followed a policy to treat a part of the R & D cost of existing product/process as deferred
cost, share applicable for the year/period will be included in cost of production.
R & D cost incurred for developing a new product should be excluded from calculation of cost of
production.
R&D cost is to be shown separately in the cost sheet as per Appendix I to CAS-4.
5.7 Administrative Overheads:
Administrative overheads need to be analyzed in relation to production activities and other activities.
Administrative overheads in relation to production activities shall be included in the cost of production.
Administrative overheads in relation to activities other than manufacturing activities e.g. marketing,
projects management, corporate office expenses etc. shall be excluded from the cost of production.
The role of administration is to facilitate the manufacturing, general policy making and marketing
activities. The administrative overheads shall be included in the cost of production only to the extent they
are attributable to the factory. Administrative overheads in relation to activities other than manufacturing
activities e.g. marketing, selling, depot/branches etc. shall be excluded from the cost of production.
Administrative Overheads for production may include share from:
• Salaries of staff for administrative and other departments relating to production such as Accounts,
Purchase, HRD, Production Planning, Security etc.
• General office expenses - like rent, lighting, rates & taxes, telephone, stationery, postage etc.
• Depreciation of office building, office equipment, furniture, vehicles, etc
• Repairs & Maintenance of office building, office equipment, furniture, vehicles, etc.
• Legal expenses in relation to factory.
Treatment of Head Office/Corporate Office Expenses:
A company may have a number of factories with a head office. In a multi-locational/ multi-product
company, there are common activities carried out at Head Office like purchase, inventory management,
finance, personnel, R & D, Quality Assurance, security etc. These activities sometimes, are centralized
at one place i.e. Head Office for business convenience and scale of economy and booked as head
office expenses along with other activities like secretarial, project, treasury, investment, trading, etc.
They do not form part of the Administration overheads. For example: Industrial relation Department;
Material management; Operation/production planning Department; Human Resources, System Design
& Development Set Up and the like are production related activities. Nomenclature or place where
the activity takes place is not relevant. In such a situation, activities at Head Office/Corporate level
are to be clearly demarcated and segregated so as to distinguish activities that contribute clearly and
directly to production activities from general management and administration activities. It is necessary
to properly analyze the expenses of such activities of head office and allocate these to plants/products
on rational basis.
Freight and forwarding charges on dispatch of goods for captive consumption:
In case goods for captive consumption are dispatched from one factory premises to another factory
premises, the cost of transportation incurred by sender of the goods is to be treated as cost of
transportation under Rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods)
Rules, 2000, hence excluded from calculation of cost of production for CAS.
5.8 Packing Cost:
If product is transferred/dispatched duly packed for captive consumption, cost of such packing shall
be included.
Packing cost includes both cost of primary and secondary packing required for transfer/dispatch of the
goods used for captive consumption.
Packing Cost includes:
I. Cost of Packing Material used
II. Job charges paid for manufacture of packing material, if any.
III. Packing charges including salaries & wages of the persons involved in packing activity.
IV. Other expenses relating to packing activity.
Landed cost of the packing material should be calculated as per the guidelines given in para related
to material cost. If product for captive consumption is transferred without packing (unpacked), packing
cost need not be included in the cost of production. In case, captive product is transferred on returnable/
durable packing container, pro-rata cost shall be estimated and charged based on the life of the
container. In case packed goods are sent to job worker, the cost of packing will form part of cost of
production, unless these are returned to buyer for re-use.
Packing cost includes both cost of primary and secondary packing required for transfer/ dispatch of
the goods used for captive consumption.
5.9 Absorption of overheads:
Overheads shall be analyzed into variable overheads and fixed overheads.
Variable Overheads are the items which change with the change in volume of production, such as cost
of utilities etc.
Fixed overheads are the items whose value do not change with the change in volume of production
such as staff salaries, rent etc.
The variable production overheads shall be absorbed in production cost based on actual capacity
utilization.
The fixed production overheads and other similar items of fixed costs such as quality control cost,
research and development costs, administrative overheads relating to manufacturing shall be absorbed
in the production cost on the basis of the normal capacity or actual capacity utilization of the plant,
whichever is higher.
Absorption of overheads:
Based on behaviour, overheads are classified as variable overhead and fixed overhead. Variable
Overheads comprise of expenses which vary in proportion to the change in the volume of production
e.g. cost of utilities, royalty, job charges, etc.
Fixed overheads comprise of expenses which do not vary with the change in volume of production such
as of rent, insurance, technical assistance/know-how fees, amortized cost of moulds, patterns, patents,
hire charges for tools and equipments, charges for a particular design, and the like.
The principles laid down in CAS-3, relating to the methods of accumulation, allocation, apportionment
of overheads to different cost centers and absorption thereof to products or services on a consistent
and uniform basis in the preparation of cost sheet should be followed for the purpose of allocation and
absorption of overheads.
utilization. The fixed production overheads shall be absorbed on normal capacity basis or actual capacity
utilization whichever is higher. Normal Capacity is the production achieved or achievable on an average
over a period or season under normal circumstances taking into account the loss of capacity resulting
from planned maintenance. Normal capacity for a defined period is the practical capacity minus the
loss of productive capacity due to external factors. Whereas Practical or Achievable capacity as “the
maximum productive capacity of a plant reduced by the predictable and unavoidable factors of
interruption pertaining to internal causes such as inevitable interruptions due to time lost for preventive
maintenance, repairs, set ups, normal delays, weekly off days and holidays etc.
An illustration on absorption of overheads based on normal capacity utilisation is at Annexure IX.
A reconciliation statement showing the amount incurred under different heads of overheads and
amount absorbed by different products should be prepared for this purpose. The reconciliation will help
in ensuring accuracy of cost of production in cost statements.
5.10 Valuation of Stock of work-in-progress and finished goods
Stock of work-in-progress shall be valued at cost on the basis of stages of completion as per the cost
accounting principles. Similarly, stock of finished goods shall be valued at cost. Opening and closing
stock of work-in-progress shall be adjusted for calculation of cost of goods produced and similarly
opening and closing stock of finished goods shall be adjusted for calculation of goods dispatched.
For determining the cost of production for captive consumption, adjustment for opening and closing
stock of work-in-progress shall be made. The valuation of opening stock and closing stock of WIP is
valued at cost on the basis of stages of completion. Similarly for calculation of cost of finished goods
dispatched, adjustment for opening and closing stock of finished goods, if any, is to be made. In case
the cost of a shorter period is to be determined, where the figures of opening and closing stock are not
readily available, the adjustment of figures of opening and closing stock may be ignored.
Adjustment of opening and closing stock of WIP/finished goods will arise only when the cost of production
is to be determined for historical cost and due consideration shall be given for above adjustment in
determining the cost of production. However, if cost of production is to be determined for a future
period, it will be based on projected cost and projected capacity utilisation. In such cases, adjustment
of opening and closing WIP/finished goods and valuation thereof does not arise.
5.11 Treatment of Joint Products and By-Products
A production process may result in more than one product being produced simultaneously. In case joint
products are produced, joint costs are allocated between the products on a rational and consistent
basis. In case by-products are produced, the net realisable value of by-products is credited to the cost
of production of the main product.
For allocation of joint cost to joint products, the sales values of products at the split off point i.e. when the
products become separately identifiable may be the basis. It may be allocated based on a measure
of the number of units, weight or volume. Some other basis may be adopted. For example, in case of
petroleum products, each product is assigned certain value based on its certain properties, may be
calorific value and these values become the basis of apportionment of joint cost among petroleum
products.
The joint cost shall be allocated to the cost of production of Joint Products as per the generally accepted
cost accounting principles.
By-product:
By product is a product recovered incidentally from the material used in the manufacture of main
products. It has lower importance compared to the main product(s).It is difficult to determine the cost
of by-product. By products are sold:
(1) Either In original form without further processing; or
(2) or processed in order to be saleable. In such case, the main product is credited with the sale
realization (gross/net) as the case may be. In other words expenses incurred to bring by-product
to marketable conditions shall be adjusted from the sale of by product and net realizable value of
by-product shall be credited to cost of production of main product.
In case sale realization is not available, credit to main product at substitute value of by product may
be given.
5.12 Treatment of Scrap and Waste:
The production process may generate scrap or waste. Realized or realizable value of scrap or waste
shall be credited to the cost of production.
In case, scrap or waste does not have ready market and it is used for reprocessing, the scrap or waste
value shall be taken at a rate of input cost depending upon the stage at which such scrap or waste is
recycled. The expenses incurred for making the scrap suitable for reprocessing shall be deducted from
value of scrap or waste.
5.13 Miscellaneous Income:
Miscellaneous income relating to production shall be adjusted in the calculation of cost of production,
for example income from sale of empty containers used for dispatch of the captively consumed goods
produced under reference.
The miscellaneous income needs to be analyzed in detail for its nature (capital / revenue) and if not
related to production activities, the same may be ignored. The income arising out of sale of used empty
containers of the input materials shall be adjusted in the cost of production.
5.14 Inputs received free of cost:
In case any input material, whether of direct or indirect nature, including packing material is supplied
free of cost by the user of the captive product, the landed cost of such material shall be included in
the cost of production.
Landed cost of inputs received free of cost should be calculated as per the guidelines given in para
related to material cost. The cost of inputs received free of cost shall be included in the cost of production
for captive consumption.
5.15 Moulds, Tools, Dies & Patterns etc received free of cost:
The amortization cost of such items shall be included in the cost of production.
Amortization should be done on the basis of estimated production that can be achieved during the life
of the Mould, Tool, Die or Pattern. After the estimated life, if the moulds, dies are still in use and if the full
cost has already been amortized, then amortization cost need not be considered for the purpose of
cost of production. However, for this purpose, proper record needs to be maintained. The estimated life
/ estimated production may be certified by technical person. Where the dies, moulds etc are supplied
by the customer, the necessary details may be obtained from the customer.
In case of dies, moulds etc purchased / manufactured in-house, its cost should be ascertained and
amortised over its useful life.
5.16 Interest and Financial Charges:
Interest and financial charges being a financial charge shall not be considered to be a part of cost of
production.
Interest and financial charges can be on bank borrowings, amortization of discounts or premium related
to borrowings, amortization of ancillary cost incurred in connection with the arrangements of borrowings,
finance charges in respect of finance leases and exchange differences arising from foreign currency
borrowings to the extent they are regarded as an adjustment to the interest costs.
Interest and financial charges are finance cost and do not form part of cost of production for captive
consumption. Logic for excluding interest from captive consumption is that for purpose of assessable value
a margin of 10% of cost of production is added to take care of return on capital employed. (Normally
return on capital employed takes care of return on owners’ equity and interest on borrowed fund). To
make the calculation simple above approach of 110% of cost of production of captively consumed
good is taken as assessable value.
5.17 Abnormal and Non-recurring Cost
Abnormal and non-recurring cost arises due to unusual or unexpected occurrence of events, such as
heavy break down of plants, accident, market condition restricting sales below normal level, abnormal
idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment
compensation, lay-off wages etc. The abnormal cost shall not form the part of cost of production.
Loss due to fire, natural calamities and the like (as indicated above) are treated as abnormal and
non-recurring cost, and excluded from cost of production. Further, expenses which are not related
to manufacturing activity and which do not form part of the cost as per the generally accepted cost
accounting principles may be excluded for this purpose e.g. - donations, loss on sale of fixed assets, etc.
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