Cost of production

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ACMA.Manish Sarawgi (Querist)
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11 March 2011 While calculating cost of production as per cost sheet we not considered intrest charges but consdidered depcrecation why?Please explain

Manish Sarawgi
Cost Accountant

CA Ghanshyam Joshi

CA Ghanshyam Joshi (Expert)
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11 March 2011 Defination as per CAS-4
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.
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.

Depreciation comes under defination of Works Overhead -
5.4 Works Overheads
Works overheads are the indirect costs incurred in the production process.
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, Pollution
Control etc

Interest is other overhead cost which directly not incurred for production. It is incurred for procurement of material / inventory etc. Hence Interest shall not be considered in Cost of Production.

CA Ghanshyam Joshi

CA Ghanshyam Joshi (Expert)
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11 March 2011 Further See the defination of Administrative Overheads it indicates that which overheads other than manufacturing activity shall be excluded from cost of production -

5.7 Administrative Overheads
Administrative overheads needs to be analysed 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.

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