Cost Accounting Standards and Costing Principles
This domain tests whether you can apply the Cost Accounting Standards issued by the CASB of ICMAI to cost statements prepared under Section 148, and defend the classification and absorption judgements behind them.
What the standards fix
- CAS 1 standardises cost classification: direct/indirect, fixed/variable, controllable/non-controllable, and the normal/abnormal split.
- CAS 6 (material), CAS 7 (employee), CAS 15 (selling and distribution) and CAS 22 (manufacturing cost) prescribe what may and may not enter each cost element.
- CAS 4 governs cost of production for captive consumption; CAS 24 governs treatment of revenue (scrap, by-product, subsidy) in cost statements.
Capacity is the pivot
CAS 2 requires installed capacity, normal capacity and actual utilisation to be disclosed. Fixed overhead is absorbed on normal capacity, not actual output. Idle-capacity cost is measured separately and never loaded onto product cost.
Worked example
Budgeted fixed overhead ₹16,00,000; normal capacity 8,000 units; actual output 6,000 units. Absorption rate = 16,00,000 ÷ 8,000 = ₹200 per unit; absorbed = ₹12,00,000; unabsorbed = ₹4,00,000. That amount is idle-capacity cost: disclose separately and exclude from cost of production rather than inflating the rate to ₹266.67. Using actual capacity as the base overstates inventory and conceals the variance.
Traps
- Absorbing on actual output, hiding under-utilisation inside inventory.
- Charging abnormal waste to product cost; it belongs to the costing profit and loss account.
- Treating notional interest on owned funds, or interest on working-capital borrowings beyond actuals (CAS 17), as a cost element.
- Ignoring the prescribed CAS 4 format where output is consumed captive.