This article is going to be on CAS-4 (Cost Accounting Standard 4) issued by the Council of the Institute of Cost and Works Accountants of India along with the Guidelines on cost of production for captive consumption (Under Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000)
The objective of the article is to link CAS 4 along with Rule 8 of Central excise valuation covering main topics and its relevance.
Objective of the standard CAS-4
The main objective behind this standard is to bring uniformity in the principles and methods used for determining the cost of production of excisable goods used for captive consumption.
Scope of CAS-4
Determining cost of production to arrive at assessable value of excisable goods which was used for captive consumption
Whether Non-Excisable goods are considered?
Assessable value is computed only for excisable goods which are used for captive consumption. However, exemption under Notification No 67/65, dated 16.3.1995 is available.
Non-Excisable goods are not liable for payment of excise duty and hence not considered.
Meaning of captive consumption
Captive Consumption means the consumption of goods manufactured by one division and consumed by another division(s) of the same organization or related undertaking for manufacturing another product(s).
Why is captive consumption liable to excise duty?
Captive consumption is consumption within the factory &there is no intention of sale also! There arises a doubt as why is captive consumption liable to excise duty?
It is to be noted that, Excise duty is liable on good manufactured/produced in India. Whenever there is manufacture/production of "excisable goods", the duty liability arises, irrespective of whether the product is actually sold or not.
So, the catch here is Excisable goods being manufactured in India.
Section 209(1) (d) of the Companies act, 1956
As per the provisions of the above section, where Cost Accounting Records are statutorily required to be maintained, the Cost Accountant certifying the cost of production for captive consumption shall verify the correctness of the cost from these records.
The cost sheet should be prepared in the format as par Appendix – 1 or as near thereto as possible. The manufacturer will be required to maintain cost records and other books of account in a manner, which would facilitate preparation and verification of the cost of production.
Manufacturers not covered under Section 209(1) (d) of the companies act, 1956
It is desirable that those who are not covered under Section 209(1) (d) also to maintain cost accounting records in line with the records so prescribed as to facilitate determination and certification of cost of production.
Valuation of Captively consumed goods
Provisions regarding Valuation of Captively consumed goods are given under Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
Value shall be 110% (w.e.f 5-8-2003) of the cost of production of such goods captively consumed.
Cost of production
Cost of production is also being defined under CAS - 4, which is as follows:-
Cost of production shall consist of the following:-
1. Materials consumed
2. Direct wages & salaries
3. Direct expenses
4. Works overhead
5. Quality control cost
6. Research & development cost
7. Packing cost (Includes Primary and secondary packing cost)
8. Administrative overheads related to production.
In simple words, all expenses directly related to the production are included.
Valuation under different scenarios
>Partly captively consumed and partly sold
Goods captively consumed - 110% of cost of production.
Goods sold - Section 4A of Central excise act, 1944 is the basis for valuation.
>Goods transferred to sister concern
Rule 9 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules to be applied.
During manufacture, intermediate goods may emerge which may be used for manufacture of the final product. In these cases, excise duty is payable on such goods (if such goods are excisable goods). However, Exemption can be claimed on the same.
Manufacturer of intermediate products clearing the goods on job work under challah procedure in terms of Cenvat Credit Rules, 2004 need not pay any duty at the time of clearance to the job worker.
Provided job worked items are returned to the factory of manufacturer within 180 days.
>Availment of credit
Where manufacturer avails credit on the inputs, there is no applicability of Rule 8 as reversal of Cenvat Credit itself is sufficient. This is being clarified by the Board in Circular No 643/34/2002/CE dated 1.7.2002
Other items to be included/excluded from cost of production
1) Inputs received free of cost - Whether to include in cost of production?
Inputs received for a material along with the landed cost of such material is included in the cost of production.
2) Moulds, Tools, Dies & patters - Whether to include in cost of production?
The amortization cost of such expenses to be included in cost of production.
3) Interest & finance charges - Whether to include in cost of production?
Interest & finance charges being a financial charge to be excluded from cost of production.
4) Abnormal cost - Whether to include in cost of production?
It shall not form part of cost of production.
5) Miscellaneous Income - Whether to include in cost of production?
To be adjusted against cost of production
6) By-Products, Waste & Scrap - Whether to include in cost of production?
By-Products, Waste & Scrap are incidentally automatically generated during the manufacturing process. As per section 209(1) (d) of the companies act,1956, there is no provision for calculation of cost of production for the By-Products, Waste & Scrap.
As per CAS - 4, the realizable value of By-Product, waste & scrap is reduced from the cost of production while computing cost sheet.
Method of valuation followed for issue of goods to production
There are various methods for valuation of stock. Most widely accepted methods are FIFO and weighted average. (CAS-4)
1. If there is any change in cost accounting principles and practices during the concerned period which may materially affect the cost of production in terms of comparability with previous periods, the same should be disclosed.
2. If opening stock and closing stock of work -in-progress and finished goods are not readily available for certification purpose, the same should be disclosed.
By: Ayyswariya Varkhedi