TMI BlogGuidance Note on Cost Accounting Standard on Cost of Utilities (CAS-8), DATED 11-4-2013X X X X Extracts X X X X X X X X Extracts X X X X ..... sing, manufacturing, or mining activities has to maintain cost accounting records in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the ICAI, to the extent these are found to be relevant and applicable. The above Rules further provides that these will be applicable to companies wherein: (a) aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or (b) the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or (c) the company's equity or debt securities are listed or are in the process of listing on any stock exchange whether in India or outside India. Chapter 1 Introduction Production processes need several inputs other than raw material in the form of water, steam, electricity, and the like. These inputs are known as utilities. Utilities are classified according to the nature of utility, such as power, steam, water, compressed air and so on. A distinction is to be made whether an input is a util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring process may need some form of compressed air, whether for running a simple air tool or for more complicated tasks such as the operation of pneumatic control. Compressed Air Utility may be centralized services or it may be that individual air compression units are provided for each department depending upon the requirement. In case individual air compression units are provided it may be possible to merge the cost of operating the air compressor with the respective departmental expenses. But where centralized air compression and supply is made, a separate air compressed utility is to be accounted. Classification of utility: Various types of utilities are used in manufacturing process as indicated in Annexure-1. These are classified according to the nature of utility, such as power, steam water, compressed air and the like . Examples of cost measurement are: Use of historical cost; Use of actual or standard cost; Designation of items of cost which must be included or excluded from the utility cost. Unit of Measurement of Utility: Each utility has a different measurement unit considering its nature and cost is expressed in per unit of the related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in relation to which costs are ascertained. Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose. Normal capacity: Normal Capacity is the production achieved or achievable on an average over a number of periods or seasons under normal circumstances taking into account the loss of capacity resulting from planned maintenance. Standard Cost: A predetermined cost of resource inputs for the cost object computed with reference to set of technical specifications and efficient operating conditions. Utilities: Significant inputs such as power, steam, water, compressed air and the like which are used for manufacturing process but do not form part of the final product. Stand-by utilities: Any utility created to safeguard against the failure of the main source of inputs. Chapter 3 Principles of measurement 5.1 Each type of utility shall be treated as a distinct cost object. As each utility is a distinct cost object, cost of each utility is to be collected and measured separately. For example power, steam, water, compressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heat from TG (Turbine Generation) is recovered in waste heat recovery unit and used for production of steam, due credit should be given to the Power plant and corresponding charge to SGP(Steam Generation Plant). Charging of power to the consuming cost object is generally done at the weighted average of the cost of power purchased, generated and distribution cost at the consuming point. Steam: A separate statement of cost of steam is prepared indicating the quantity of steam generated, cost of fuel, soft water, power, employee cost for operating staff, sundry supplies, chemical additives, deprecation and other works overhead. Unit cost of steam is arrived at on the basis of units consumed in different departments after adjusting distribution loss. Steam may be of high pressure, low pressure and medium pressure with multiple paths by which the steam pressure is reduced according to the purpose of use. Steam costs are highly dependent on the path that steam follows in the generation and distribution system. Raw water: Raw water is either purchased or obtained from ground wells/canal. The cost of water mainly consists of share of cost of power allocated through inter-util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned as per paragraph 5.3.1. If utilities generated are transferred to inter units of an entity, the cost of distribution of such utilities will be included in the cost of utility as determined under para 5.3.1. It will comprise cost of generating utility and cost of distribution facility. Distribution may be through a pipe line/transmission line. The cost of maintenance of pipe line/ Transmission line for transfer of utility will be added to the cost of utility. 5.3.3 Cost of Utilities generated for the inter company transfers shall comprise direct material cost, direct employee cost, direct expenses, factory overheads, distribution cost and share of administrative overheads. In case of inter company transfer, cost of utility so transferred should comprise as para 5.3.2 viz. direct material (fuel and the like), direct labour, direct expenses, chemicals, share of factory overheads, distribution cost and share of administrative overhead. Cost of a utility determined as above plus share of administrative overhead is to be charged for inter company transfer. Transmission loss should be treated as per agreement between the parties. 5.3.4 Cost of Utilities generated for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Any difference between the standard and actual prices of purchase results in input/ material price variance. The material price variance is to be treated as part of input/material cost. There may be also input/material usage variance (the difference between the quantity required as per standard and actual consumption). Normal variance will form part of the cost of input. Abnormal usage variance will not form part of the utility cost. There can be other variances relating to employee cost, overhead between actual and budgeted and the like. Variances due to normal reasons should be treated as cost while the variances due to abnormal\ reasons should not form part of the cost of production. For other expenses and overhead, expenses budgeted and actual are compared at different level of activity. 5.8 Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to any cost of utilities shall be reduced for ascertainment of the cost to which such amounts are related. Subsidy, grant or incentives are provided for specific purpose. For example, generation of non-conventional energy. Any subsidy, grant received/receivable should be reduced from the utility c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non compliance of regulatory requirements. For example not complying with boiler inspection, not safeguarding hazardous utility. Penalty so levied should not form part of the cost of utilities. 5.12 Credits/recoveries relating to the utilities including cost of utilities provided to outside parties, material and quantifiable, shall be deducted from the total cost of utility to arrive at the net cost of utility. The total cost of a utility is to be adjusted for the cost of utility supplied to outside parties if the its cost is material and quantifiable. Credit should also be given for the recovery made for the utility consumed by other units such as township and the like. The net cost arrived at, be then charged to the different units benefitted by the use of a utility. Example: (1) Where a unit has a township/colony, electricity and water charges recovered for its use may be credited to the cost of these utilities and net cost distributed to production centres. (2) If utility is sold by Unit A to outside parties, credit is to be given to the cost of utility at price of utility sold to outside parties (i.e. cost of utility including distribution + administrative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be assigned on the most appropriate basis. The cost of utilities is to be assigned on the basis of meter reading which is more reliable. In case meters have not been installed, it should be assessed on technical estimate based on equipment rating, area, volume, and the like. For example: For Product A, in the absence of meter, utility required may be assigned based on product requirement as per technical estimate. 6.3 The most appropriate basis of distribution of cost of a utility to the departments consuming services is to be derived from usage parameters. In the absence of meter, utility is to be distributed to the consuming departments based on usage parameters such as stated in the project report, technical estimates taking into account the equipment rating capacity, space, volume and the like .The project report of the plant lays down various usage requirement of utility, and the same should also be taken into account while assigning the utility consumption. Chapter 5 Presentation 7.1 Utilities costs shall be presented as a separate cost head for each type of utility in the cost statement, if material. The cost statement should indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of utility to the consuming centre adopted is to be disclosed in the cost statement. Normally it will be based on meter readings of period/technical estimates, area, etc as detailed in the table below : Power Basis Units (KWH) Amount Production Deptt A Meter reading 5700 23370 Production Deptt B Meter reading 3560 14596 Utility : Water Meter reading 1000 4100 Air-conditioning Meter reading 2300 9430 Others Meter reading 1500 6150 Total 14060 57646 Steam Basis M.Tons Amount Power House Meter Reading Production Deptt A Meter Reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / conditions of procurement are to be disclosed. The objective of disclosure is to ascertain that the transaction is at arm's length and on purely commercial terms. Example Related party XYZ Ltd Nature of relationship We and our subsidiaries own 51 percent of their Equity. Nature of transactions: XYZ Ltd supplies power Volume of transaction: During this year .2500 KWH units of power were supplied @ ₹ 4.50 per KWH for ₹ 11250. 8.1.5 The cost and price of Utility received from/supplied as inter unit transfers and inter company transfers. Inter unit transfers/inter company transfers relating to utility received/supplied is to be disclosed in the cost statement or as a foot note. It should indicate cost of a utility supplied and price of a utility purchased. In case of inter-unit transfers, utility should be at cost. if inter utility transfer is at selling price, difference between cost and price to be indicated as a footnote in the cost statement of a product. In case of inter company tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Penalties and damages paid are not an item of cost as these are levied for non compliance with regulatory /contractual requirements. These are to be excluded from cost and disclosure made as a footnote in the cost statement. 8.2 Any change in the cost accounting principles and methods applied for the measurement and assignment of the Cost of utilities during the period covered by the cost statement which has a material effect on the Cost of utilities. 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 cost of utilities are to be applied consistently between one period and uniformly applied for different utilities. If any change is made in these principles and methods results in material effect on the cost of utilities, the same should be disclosed in the cost statement or by a foot note. In case the impact of change in principles and methods of cost accounting is not ascertainable, the fact is to be disclosed by a note to the cost statements. For Example: (1) Heat recovery steam partly used for drying process was charged at of the nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.5 9.93 COAL COSUMPTION\ASH SALE -6.28 -11.34 SIDING EXPENSES 1.67 3.01 ENTRY TAX 6.25 11.28 RAW MTRL. TOTAL 422.07 762.05 CHEMICALS LIME MT 11.85 3460.21 0.41 0.74 CAUSTIC SODA MT 11.85 27512.87 3.26 5.89 H C L MT 67.94 3694.60 2.51 4.53 RESIN-FFIP LT 118.50 151.91 0.18 0.32 SULPHURIC ACID LT 2.37 8438.82 0.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined as per para 5.3.2 plus share of administrative overhead to be charged. Example: Inter Company transfer price 1. Cost of steam generation as para 5.3.1. ₹ 471.09 per MT 2. Distribution cost ₹ 2.50 per MT 3. Share of Administrative Overheads ₹ 0.50 per MT 4. inter company transfer, cost of utility ₹ 474.09 per MT Example of Sale of Utility 1. Cost of steam generation as para 5.3.1. ₹ 471.09 per MT 2. Distribution cost ₹ 2.50 per MT 3. Share of Administrative Overheads ₹ 0.50 per MT 4. Marketing overhead ₹ 0.75 per MT 5. Cost of Sales ₹ 474.80 per MT 6. Margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cost of utilities. 1.2 This standard deals with the principles and methods of classification, measurement and assignment of cost of utilities, for determination of the cost of product or service, and the presentation and disclosure in cost statements. 2. Objective The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the cost of utilities with reasonable accuracy. 3. Scope 3.1 This standard shall be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of cost of utilities including those requiring attestation. 3.2 For determining the cost of production to arrive at an assessable value of excisable utilities used for captive consumption, Cost Accounting Standard 4 on Cost of Production for Captive Consumption (CAS 4) shall apply. 3.3 This standard shall not be applicable to the organizations primarily engaged in gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ariances and take proper measure to control them. Standard costs are also used for estimation. 4.8 Utilities: Significant inputs such as power, steam, water, compressed air and the like which are used for manufacturing process but do not form part of the final product. 4.9 Stand-by utilities: Any utility created to safeguard against the failure of the main source of inputs. 5. Principles of measurement 5.1 Each type of utility shall be treated as a distinct cost object. 5.2 Cost of utilities purchased shall be measured at cost of purchase including duties and taxes, transportation cost, insurance and other expenditure directly attributable to procurement (net of trade discounts, rebates, taxes and duties refundable or to be credited) that can be quantified with reasonable accuracy at the time of acquisition. 5.3.1 Cost of self generated utilities for own consumption shall comprise direct material cost, direct employee cost, direct expenses and factory overheads. 5.3.2 In case of Utilities generated for the purpose of inter unit transfers, the distribution cost incurred for such transfers shall be added to the cost of utilities determined as per paragraph 5.3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost accounting standard, or a change would result in a more appropriate preparation or presentation of cost statements of an organisation. 6. Assignment of costs 6.1 While assigning cost of utilities, traceability to a cost object in an economically feasible manner shall be the guiding principle. 6.2 Where the cost of utilities is not directly traceable to cost object, it shall be assigned on the most appropriate basis. 6.3 The most appropriate basis of distribution of cost of a utility to the departments consuming services is to be derived from usage parameters. 7. Presentation 7.1 Utilities costs shall be presented as a separate cost head for each type of utility in the cost statement, if material. 7.2 Where separate cost statements are prepared for utilities, cost of utilities shall be classified as purchased or generated. Such statement shall also include cost of utilities consumed along with quantitative information by individual consuming units, inter unit transfers, inter company transfers and sale to outside parties wherever applicable. 8. Disclosures 8.1 The cost statements shall disclose the following: 1. The basis of distribution of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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