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Guidance Note on Cost Accounting Standard on Administrative Overheads (CAS-11)

CAS - 11 - G Note - Companies Law - CAS - 11 - G Note - The Council of the Institute of Cost Accountants of India has issued the Cost Accounting Standard - 11 (CAS-11) on Administrative Overheads which lays down a set of principles and methods of classification, measurement and assignment of Administrative Overheads for determination of the cost of product or service and the presentation and disclosure in the cost statements. The Guidance Note deals with principles and methods as provided in the .....

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ed under section 591 of the Companies Act, 1956 which is engaged in production, processing, manufacturing or mining activities have to maintain cost accounting records in accordance with the Generally Accepted Cost Accounting Principles (GACAP) and Cost Accounting Standards issued by the Institute, to the extent these are found to be relevant and applicable. The above Rules further provide that these will be applicable to companies wherein: (a) aggregate value of net worth as on the last date of .....

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ted under Section 233B of the Companies Act, 1956 to certify inter-alia that books and records maintained by the company are in conformity with the Cost Accounting Standards issued by the Institute to the extent these are found to be relevant and applicable. CHAPTER 1 INTRODUCTION Administrative Overheads have been defined by the CAS-11 as the cost of all activities relating to general management and administration of an entity. These costs generally represent amounts incurred at Head office/Cor .....

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s or manufacturing. Such costs are in the nature of administrative support to functions connected with the production e.g. Purchase, factory accounts, factory administration etc. Administrative cost on the other hand represent costs incurred in connection with the management of affairs of the entity such as Policy making, Finance, Human resources and the like. For example: Indirect materials - printing and stationery; office supplies; Indirect employee costs - Salaries of administrative director .....

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ull; Law and Taxation • Information Technology • Security Administrative costs include all executive, organizational, and clerical costs associated with general management of an organization rather than with manufacturing, marketing, or selling. For examples administrative costs include executive compensation, secretarial salaries, general accounting, public relations, and similar costs involved in the overall, general administration of the organization as a whole. Other Administrative .....

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tion - Salaries and fringe benefits of general and administrative personnel. For example salaries of managers, and other employees in the administrative functions of the company. Rent, rates and taxes, travelling and other administrative expenses; 2. Cost information should be collected and analyzed systematically and consistently, whether for a routine information system, or for a specific application and/or purpose. In the preparation of cost statement and its attestation, if required, Adminis .....

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ement and administration of an organisation. 4.4 Cost Object: This includes a product, service, cost centre, activity, sub-activity, project, contract, customer or distribution channel or any other unit in relation to which costs are ascertained. 4.5 Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. 4.6 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose. 4.7 Normal capacity: Normal Capacity is the production .....

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anagement and administration of an organisation. Administrative Overheads is the cost of all activities relating to general management and administration of an organisation. It is represented by cost of shared services, infrastructure cost and general management cost. Resources consumed are in terms of employee costs, utilities, office supplies, legal expenses and outside services. The measurement of these resources consumed is to be determined in terms of relevant cost accounting standards. CAS .....

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valued at issue rate adopted i.e. First in First out, Last in First out, Weighted Average. Such basis should be followed consistently. Indirect employee cost is to be measured in terms of CAS-7 (Employee cost). Employee cost relating to administrative staff should be the gross pay and allowances payable. It should take into account the employee's salary including all allowances and other benefits, such as Employer's contribution to EPF, FPS, ESIS, Holiday Pay, Gratuity Payable, Bonus and .....

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surance, fully maintained company's car with driver, gardener, watchmen and the like. These should form part of employee cost. Remuneration paid to non-executive directors should be treated as Administrative Overheads. Utilities consumed by administrative cost centres are to be collected and measured in accordance with principles laid down by CAS-8. Repair and maintenance cost should be measured in accordance with principles laid down by CAS -12. 5.2 In case of leased assets, if the lease is .....

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he risks and rewards incidental to ownership of an asset. Whereas an operating lease is a lease other than a finance lease. The basic concept of lease accounting is that operating lease is merely rental, whereas financial is a disguised purchase. Lease Rentals in respect of assets taken on 'Operating Lease' for administrative activities should be included under Administrative Overheads. Payments under an operating lease will be recognised by the lessee as an expense over the lease term. .....

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hased, licensed or customised. Where software is included in the purchase price of hardware (For example operating system software) and the cost of the software cannot be easily calculated, the software should be capitalized and amortized as part of hardware. In case of licensed software, if one-off licensing fee is paid during the period in order to use the software which has acquired service potential or future economic benefits relating to that software, such cost of license fee should be cap .....

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. 5.4 The cost of administrative services procured from outside shall be determined at invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash discount), taxes and duties refundable or to be credited. Various types of services related to administration may be procured from outside, such as legal consultancy, management consultancy, internal audit, and so on. In such cases determination of cost of administrative ser .....

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systematic basis. These should be matched with the related cost for which these are intended to compensate over the period. For example: Subsidy may be receivable for any social service, such as crèche, schooling, community centre and the like. Subsidy receivable for this purpose may be reduced from the cost of such services, while ascertaining the cost of the administrative overheads. 5.6 Administrative overheads shall not include any abnormal administrative cost. Abnormal cost has been .....

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ng from natural calamity (flood, earthquake, and the like). • Sudden breakdown/ loss due to major fire accident. It should not form part of the administrative overheads and should be dealt with in the costing profit and loss account. 5.7 Fines, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form part of the administrative overheads. Fines, Penalties, damages and the like are levied by the statutory authorities for non-compliance with sta .....

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quantifiable, shall be deducted to arrive at the net administrative overheads. If any administrative services are provided to other activity/unit without any consideration, the cost of the same, if material and quantifiable, should be determined and adjusted against the Administrative Overhead. For example management consultancy services provided to other unit, the cost of the same should be adjusted against the administrative overheads 5.9 Any change in the cost accounting principles applied f .....

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management cost. Principles applied for measurement of these resources are to be as per relevant cost accounting standard and are to be followed consistently. However, change in principle of measurement of Administrative Overheads should be applied if it is required by law or for compliance with the requirements of a cost accounting standard or a change would result in a more appropriate preparation or presentation of cost statements of an entity. For example profit sharing bonus paid to employe .....

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n accumulated and measured, these are to be assigned to a cost object. Cost Object is a logical sub-unit for collection of cost. Cost Object may be classified in different ways like function-wise and nature-wise. Thus cost object may be any customer, product service, contract, project, activity or other work unit for which a separate cost measurement is desired. For assigning the administrative overheads, traceability is a key element. Tracing administrative overheads to cost objects can occur b .....

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ethod of direct cost tracing usually relies on the observation, counting, and/or recording of the consumption of resource units, such as staff hours or days that are spent on or assignment, or gallons of fuel consumed in a transport trip. Direct tracing also applies to specific resources that are dedicated to particular outputs. Direct cost tracing often minimizes distortion and ensures accuracy in cost assignments. It shall be applied only to items that account for a substantial portion of the .....

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. In case of indirect cost there is no relationship between the cost and cost object and tracing is not economically feasible. The following steps are to be followed when tracing the administrative cost: 1. Identify the activities that cause the administrative costs, 2. Measure the cost of those activities; and 3. Assign the cost of the activities to those products and customers. Various items of administration overheads are first collected according to nature of expenditure. These are arranged .....

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Bases Office rent, rates and taxes Floor area Depreciation of office building Floor area Legal expenses Number of cases handled/time basis for consultancy Salaries and allowances Number of employees In brief, administrative costs shall be assigned on a reasonable and consistent basis. Directly tracing costs might be a preferred approach when economically feasible. Assigning costs on a cause-and-effect basis shall be considered for costs that cannot be directly traced to outputs. This issue ther .....

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bjects on the basis of relative benefits received or other equitable relationship. Assigning of costs shall be done on a reasonable and consistent basis. Testing reasonableness shall take into account the purpose of the cost information and the economic feasibility of collecting and assigning it. Following criterion shall be considered: Assigning costs on a cause-and-effect basis shall be considered for costs that cannot be directly traced to outputs. For example: A computer technology departmen .....

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ical services. Assigning Cost - Benefit received: Standard provides for assigning of Administrative Overheads to the various cost objects in proportion to the benefits received by them. Benefits received when measurable and traceable, provide guidance for assignment. The beneficiaries of the output of the cost pool shall be identified and costs allocated in proportion to the benefits received. Benefits received shall be interpreted as meaning the receiving of services or goods by the activity re .....

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t statement. 7.2 Element wise details of the administrative overheads based on materiality shall be presented. Administrative overheads are required to be presented as a separate head in the cost statement. Element wise details of administrative overheads are to be indicated in the cost statement if these are material. What is considered material or immaterial depends on the facts of each case. The materiality of a particular cost is important in classifying costs. The less significant a cost, t .....

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e overheads adopted for cost objects/units in the cost statement or by way of foot note. • Any imputed cost included as a part of administrative overheads. Imputed cost does not form part of the cost as it does not involve any cash outlay. However, if any imputed cost has been included in the administrative overheads, the same shall be disclosed. For example: Rent of Rs. Two Lakh for owned office building may have been included in Administrative Overhead. • Administrative overheads inc .....

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ns are to be disclosed. The objective of disclosure is to ascertain that the transaction is at arm's length and on purely commercial terms. For example: Related party → A B C Ltd Nature of relationship → We and our subsidiaries own 51 percent of their Equity. Nature of transactions: Hiring of office premises. Office premises measuring 15000 sq ft has been hired from ABC Ltd @ ₹ 1500 per sq ft. The rate is a market prevailing rate for such premises and transaction is at arm .....

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ing to the administrative overheads. If any credit or recovery is considered while determining the administrative overheads the same shall be disclosed. For Example: certain administrative services were provided during the year to an Associate/Group entity unit, a sum of ₹ 15 lakh received has been credited to the Administrative Overheads. • Any abnormal portion of the administrative overheads. Abnormal portion of administrative overhead in the cost of cost object is to be excluded as .....

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st and disclosure made. 8.2 Disclosures shall be made only where material, significant and quantifiable. Level of materiality and significance has not been stated in the standard. Materiality is to be judged in terms of quantity and nature of cost element and in particular context of its omission. A piece of information is material, if its non disclosure could influence the decision of a user. Materiality and significance of any information will be different from situation to situation. If mater .....

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8.4 Any change in the cost accounting principles and methods applied for the measurement and assignment of the administrative overheads during the period covered by the cost statement which has a material effect on the administrative overheads shall be disclosed. Where the effect of such change is not ascertainable wholly or partly the fact shall be indicated. Cost Accounting principles, and methods applied for the measurement and assignment of Administrative Overheads are to be applied consiste .....

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ned to various units on the basis of turnover. During the current year the general management expenses have been assigned on a composite ratio which takes into account turnover, capital employed, gross profit, employee cost of units. Previous year's figure is not on comparable basis. ANNEXURE I List of other administrative expenses: i. General Charges; ii. Casual labour; iii. Licence fees; iv. Insurance expenses; v. Training expenses; vi. Printing of the Annual Report; vii. Telephone; viii. .....

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e of administrative fixed assets (machines and furniture located in HO; and xxiv. Other miscellaneous expenses, such as Reception; Company party to celebrate functions. ANNEXURE II COST STATEMENT OF PRODUCT ELEMENTS OF ADMINISTRATIVE OVERHEADS (as at serial no.9 of the Cost Statement) For the period/year ending - S.No. Item Unit Quantity Rate Amount Cost per unit 1. Material cost 1(a) Indigenous - I. Purchases II. Self manufactured 1(b) Imported 2. Other materials 3. Total Material cost 4. Utili .....

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CCOUNTING STANDARD ON ADMINISTRATIVE OVERHEADS The following is the COST ACCOUNTING STANDARD - (CAS-11) issued by the Council of The Institute of Cost and Works Accountants of India on "ADMINISTRATIVE OVERHEADS". In this Standard, the standard portions have been set in bold italic type. This standard should be read in the context of the background material which has been set in normal type. 1. Introduction 1.1. This standard deals with the principles and methods of determining the admi .....

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ents, which require classification, measurement, assignment, presentation and disclosure of administrative overheads including those requiring attestation. 4. Definitions The following terms are being used in this standard with the meaning specified. 4.1 Abnormal cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and/or due to some abnormal situation of the production or operation.1 4.2 Absorption of overheads: Absorption of overheads is charging of overheads .....

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ct, service, cost centre, activity, sub-activity, project, contract, customer or distribution channel or any other unit in relation to which costs are ascertained.5 4.5 Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. This will include interest and commitment charges on bank borrowings, other short term and long term borrowings, amortisation of discounts or premium related to borrowings, amortisation of ancillary cost incurred in connection with the arran .....

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e over a number of periods or seasons under normal circumstances taking into account the loss of capacity resulting from planned maintenance.8 4.8 Overheads: Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object.9 5. Principles of Measurement 5.1 Administrative overheads shall be the aggregate of cost of resources consumed in activities relating to general management and administration of an organ .....

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e is an operating lease, the entire rentals shall be included in the administrative overheads. If the lease is a financial lease, the finance cost portion shall be segregated and treated as part of finance costs. 5.3 The cost of software (developed in house, purchased, licensed or customised), including up-gradation cost shall be amortised over its estimated useful life. When hardware requires up-gradation along with software up-gradation, it is recommended that compatible estimated lives be use .....

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ect to which such amounts are related. 5.6 Administrative overheads shall not include any abnormal administrative cost. Example: Expense incurred in a situation of natural calamity. 5.7 Fines, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form part of the administrative overheads. 5.8 Credits/ recoveries relating to the administrative overheads including those rendered without any consideration, material and quantifiable, shall be deducted t .....

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feasible manner shall be the guiding principle. 6.2 Assignment of administrative overheads to the cost objects shall be based on either of the following two principles; (i) Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost. (ii) Benefits received - overheads are to be apportioned to the various cost objects in proportion to the benefits received by them.10 The costs of shared services should be assigned to user activities on the basis of actua .....

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