Cost Accounting Standards (CAS) - Justification

 

This is a post by CMA.Veerarghavan Iyengar MIMA,FICWA

Cost Accounting standards are basically an attempt to standardise the Cost Accounting practices among businesses and Governance. The Existing and Generally Accepted cost accounting practices are gradually attempted to be replaced with a set of documents in the nature of guidance to treatment of Transactions in the cost Accounting system of any enterprise,governance and charity.This will in turn standardise the practices of drawing general purpose cost statements for an entity, governance or charity and specifically standardise the entire Cost accounting practices in the entity, governance or charity.

General Purpose Cost Statements will generally address:
1.Total cost of production or service.(Average and incremental cost as a corollary)
2.Resource utilisation statement.
3.Wastage reports and recycling cost.
4.Production or service efficiency.
5.Project cost to benefit.
6.Variance reports on standard cost and budgeted cost.

STAKE HOLDERS THAT CAS will Transfer Benefit:

1.Business, its Management: Business survives on its operations and strategy both depends on proper measurement and timely reporting. An evolved cost accounting system exactly enables the right decision support in the area of operations and strategy by measuring Cost of production , resource consumption, wastage analysis ,Variances from the plan and  helps In project planning,improving efficiency in operations and capital investment decision making.It also helps the management in reorienting, re-engineering the supply chain and enables assessment of improving revenues through alternative Cost incurrence path.

Some of the standardised techniques such as Target Costing , life-cycle costing helps in real-time assessment of business sustainability.

2.Owners
.-These category of stakeholders play dual role of Investor-manager, specially family owned businesses, they are keen on operations and strategy of the enterprise and are eager to improve the operation and devise a sustainable strategy for the enterprise.
As an Investor they are permanent stakeholder and not fly-by-night kind of a investor, they look at long term projections and sometimes take certain steps that are pretty risky proposition to stay-put in the business.As there is no delienation between their role as manager and investor they are cautious as well on sustainability issues,An evolved cost accounting in the enterprise is a window for implementing their perception on operations and strategy into a decision goal.

3.Investors.-Investors are of different categories , the bankers and the FIIs, the venture capitalist and HNIs,all have different perception of how to make money out of money,the commonality being they stay away from business operation, though most of them may be satisfied by certain statements reflected in the Annual reports specially when the exit route is easy(liquidation of stakes through organised markets), they may yet be interested in specific operation details on Cost,Efficiency,Projections of revenue,product life-cycle,strategic goals for sustenance,resource availability among other things to make a clear decision to stay-invested.Most of these investors occupy board membership and hence become insiders from outside and have access to all data of operations.

4.Regulators
.-these are authorities in the form of SEBI,RBI,tariff authorities,environment authority,energy regulator,Licensing authorities and others who may need specific window of access to operations regularly and would have either a tailor driven format to fill in and submit or may undertake regular physical inspection of records maintained.Most of these information pertains to Cost, Quality,wastage and efficiency and process transperancy.An evolved CAS would assure the regulators of relying on the reports generated for the purpose.

4A.Taxmen.
-Tax authorities are keen in looking at the business from two angles 1. Income disclosure(direct taxes) 2.Production or service rendered figures(indirect).there are other tax authorities whose focus may not be business operations or generation of revenue.
As far as direct taxes are concerned the taxmen rely heavily on computation of income derived from book profit.Computation of income has two aspect the allowances and disallowances which are based on the core principles that the aspect of allowances will be needed to sustain business and the aspect of disallowances would be needed to cut exhorbitance and notionality.
The primary defect in arriving at the computation of income currently is heavy reliance on Financial statements and judgemental nature of assessment,be it depriciation or investment allowance,there are two ends to each issue one is at the hands of the assessing which he pulls southward and the other is with the authorised representative which he pulls northward for the business.A “cost-based computation of income” is currently lacking even while framing various amendment in the finance act and also while assessing income of business for tax purpose.A right use of this technique will result in objective assessment of income and lesser disputes and lead to healthier business practices and compliance.
Indirect taxmen requires data correlating Input-output and since the tax is based on production or rendering of service all the operational data are vital for assessment.Currently Indirect tax collection takes the help of existing cost accounting system where ever available and this needs to be nehanced and applicability made universal from current selective mandate.

5.Government.-
Government and governance are focal point of any accountability mechanism and a Democratic-socialist republic of India which  endeavour equality of opportunity and freedom, it is essential to ensure proper utilisation of resources,delivering the right product or services at reasonable cost.Government is entrusted with the planning process for overall development of the economy and society and to ensure this it needs to keep track of the Business to ensure its operations are not detrimental to the societal needs and an evolved CAS its consumption by the government will infuse healthy and transperant economic progress,Government has already an evolved mechanism of consumption of CAS through CARR and cost audit which need to mature at the highest level through good governance practices.

6.Courts
.-Cases often reaches court specially under the consumer protection act,environmental laws and various other punitive legislations which require thorough insights into business operations before being judgemental on the issue.A transperant and an evolved mechanism of reporting to the management is assurance of credibility in the system and can be relied upon by the courts.

7.Consumers
.-Consumers are the main stakeholders- interested- yet currently deprived of Cost statements and related details.As a consumer every one is interested in cost of product and the quality, while this needs a transperant and an accountable approach by the business, to assure the customers that they are not cheated,often these are never addressed as an issue and there are people in the establishment to propagate Demand-supply theory overarching other requirements and to that extent the society is yet to evolve.Some positive action has been taken by enactment of the consumer protection act to redress the grievance through courts.

8.General Public or Citizens
.Democracy functions through representation and is run by the three pillers-the Legislature, executive and judiciary,The Polity of India belongs to all and deprives none.There is an assurance to equality of opportunity in the constitution and protection of socially and economically deprived.Economic deprivation occurs through cornering of wealth and commanding a price for it.While the resources of the country and its utilisation is the concern of the citizens who constitute the State, the right price and currently the environmental concerns cannot be neglected and hence the transperancy in doing business and assurance as to the cost, quality and price.

9.International community.A standardised Cost Accounting system which is accountable and transperant will reaasure the international community, which is globalised and moving towards global practices, that the price of the commodity and services they pay are realistic as to the cost components while adjusting to other value criteria,The resources of the globe are not wasted in the production processes and while rendering of service,that there is continuous innovation to improve efficiency of nations and their quality of output.CAS will enable such a decision support mechanism.

10.Environmentalist.We are green and we want to be in the near future and pass it on to the GenNext , so that the planet is not left barren.The concerns emerge from exploitation of resources that create imbalances. Greens want assurances from the micro-level and CAS will trigger a set of practices that will assure the world that activity performed in the course of business is not violating the nature.All utilisation reports will pass efficiency reviews and thus will enable business to be on track and address the concerns of the greens.

CAS coverage:

1.All Business and enterprise.
1A.Commercial Agriculture.
2.NGOs
3.Not-for profit.
4.Governance.
5.Charity.

CAS Principles: Bringing about Commonality in——–

1.Identification
2.Recognition
3.Measurement
4.Assignment
5.Absobtion

———————METHODOLOGIES of determining components of cost.

Using appropriate techniques…..
For determination of ….
1.Unit cost of product/process/job/operation/or service.
2.Consumption of Resources on an average for the product/ process/ job/ operation or service.
3.Incremental usage of resources for the process dynamics.
4.Wastage measurement.
5.Re-cycling cost.
6.Price-determination.
7.Cost as a social obligation.

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One Response to “Cost Accounting Standards (CAS) - Justification”

  1. ASAHA Says:

    One of CMA friend working as Cost Accountant in a listed steel making company shared with me that his boss whoa happened to be commercial man said Look Mr CMA your calculation of cost sholud include all the expenses debited in financial accounts .I told my friend that the concept of reconciliation does not arise if all expenses debited in P/L account should include in cost accounts and setting of cost accounting std wef 1.4.2010 does not concieved.

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