Cost of raw material consumption

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

02 July 2018 A steel manufacturing Company has two business units. It has its own iron ore mines. It transfers the ore produced from mines to the other units for production of steel, which is the main business of the Company .
At mines department, the main cost involves are querying and raising cost other other direct and indirect expenses . It transfers the ore materials produced to the other segment at cost of manufacture through the debit note where the other segment shows it as “Raw Materials Consumed” in the process of manufacturing of steel.

My Query:
1. Whether the current treatment is correct to show the querying and raising cost (including other direct expenses) as “Raw material Cost “?? Or else to treat the querying and raising expenses as separate line items of expenses ?

Ref : Guidance Note to Division II to Schedule III:
9.5.1. Cost of materials consumed
Materials consumed would consist of raw materials, packing materials (where classified by the company as raw materials) and other materials such as purchased intermediates and components which are ‘consumed’ in the manufacturing activities of the company. Where packing materials are not classified as raw materials the consumption thereof should be disclosed separately. However, intermediates and components which are internally manufactured are to be excluded from the classification.
9.5.1.6. In the case of industries where there are several processes, materials may move from process to process, so that the finished product of one department constitutes the raw materials of the next. The consumption of raw materials for production of such intermediates would have to be accounted as raw materials consumed and so, it follows that internal transfers from one department to another should be disregarded in determining the consumption figures to be disclosed.

Kindly Suggest

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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06 July 2024 Based on the scenario described, where a steel manufacturing company owns iron ore mines and transfers ore produced to its steel production units, here are the considerations for treating the querying and raising costs:

1. **Treatment of Querying and Raising Costs:**
- According to the Guidance Note to Division II to Schedule III (which typically aligns with Indian Accounting Standards or Indian GAAP), the querying and raising costs (including other direct expenses) incurred at the iron ore mines should generally be treated separately from the raw material cost of steel production.

2. **Raw Material Cost vs. Other Expenses:**
- **Raw Material Cost:** This typically includes direct costs directly associated with the material being used in the production process. In your case, it would primarily include the cost of iron ore itself, as it is the raw material for steel production.

- **Other Expenses (Querying and Raising Costs):** These expenses incurred in the mining process, such as querying costs, raising costs, and other direct expenses, should be treated as separate line items under expenses rather than included in raw material costs. This is because they are not directly part of the material being consumed in the steel production process but are incurred in obtaining the raw material (iron ore).

3. **Internal Transfers and Cost Allocation:**
- Internal transfers of materials, such as from the mining department to the steel production units, should be accounted for at cost. This cost transfer would typically reflect the cost incurred up to the point of transfer, including querying and raising costs.

- However, for financial reporting purposes and in accordance with accounting standards, the querying and raising costs should not be included as part of the "Raw Materials Consumed" in the steel production segment. Instead, they should be treated separately as part of the mining operation's cost structure.

4. **Disclosure and Reporting:**
- Ensure that in your financial statements, the costs related to querying, raising, and other direct expenses at the iron ore mines are disclosed separately under appropriate expense categories. This enhances transparency and accurately reflects the cost structure of both the mining and steel production segments.

### Conclusion:
It is advisable to maintain clarity in cost allocation and reporting between the mining operation and steel production segments. While iron ore transferred to steel production units should be accounted for at cost, querying and raising costs should be treated as separate line items of expenses in accordance with accounting standards. This approach ensures accurate financial reporting and compliance with relevant guidelines and standards. For specific guidance tailored to your company's situation, consulting with a professional accountant or advisor familiar with Indian accounting standards would be beneficial.

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