9911796707
TMI BlogGUIDANCE NOTE ON COST ACCOUNTING STANDARD ON EMPLOYEE COST (CAS-7)X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 ICWAI, 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 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. The Companies (Cost Audit Report) Rules, 2011 cast a duty on a Cost Auditor appointed under Section 233B of the Companies Act, 1956 for a company to certify inter alia that books and records maintained by the company are in conformity with the Cost Accounting Standards issued by the ICWAI to the extent these are found to be relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent based on agreement with trade unions (not linked to profits) c. Incentives: quality incentive, merit incentive, service loyalty incentive, etc. An incentive is a monetary inducement for better performance in addition to regular and overtime wages. It is an extra pay for extra performance. Scheme of incentives varies from entity to entity. However incentive payments made to employees form part of employee cost. (iv) Contribution to provident and other funds: Entity covered under Provident fund and Employee's State Insurance scheme has to deduct specified contribution from the employee's wages and salaries. Such deductions are to be deposited with the Government agencies accompanied by corresponding contribution from the employer. For example if total deduction from employees during a period is ₹ 1.20 lakhs, the entity has to deposit ₹ 2.40 lakhs (Rs 1.20 lakhs from employees and corresponding contribution from employer of ₹ 1.20 lakhs) within the specified time. (v) Instead of depositing the contribution with Provident Fund Commissioner, many large and medium enterprises operate their own Provident Funds, by establishing an independent Trust for mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... injury is caused to a workman by an accident arising out of and in the course of his employment, the employer is liable to pay compensation in accordance with the provision of the Workmen's Compensation Act, 1923. The amount paid towards such compensation also form part of employee cost. ♦ Medical benefits to the employees and dependents. ♦ Free or subsidised food. ♦ Free or subsidised housing. ♦ Free or subsidised education to children. ♦ Free or subsidised canteen, crèches and recreational facilities. ♦ Free or subsidised conveyance. ♦ Leave travel concession. ♦ Any other free or subsidised facility. ♦ Cost of Employees' stock option: The employees in case of certain entities are given a right to acquire shares in the entity at a future date at a predetermined price. The offer may be free of cost, or at concessional rates. Such benefit is in the form of: (a) shares, share options and other equity instrument issued to employee at less than fair value at which these instruments are issued to third parties; and (b) Cash payment, the amount of which will depend on the future market price of enterprise sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear of service on seeking voluntary retirement besides other terminal benefits. The various employee benefits are to be provided in the accounts as per AS-15. These benefits form part of employee cost and their treatment is required to be indicated in the Cost Accounting Records. Classification of Employee cost: Employee cost, on the basis of relation with a cost centre/cost object is classified direct employee cost, or indirect employee cost of product/service. Direct employee cost is that portion of wages and salaries which can be identified with and charged to a cost object. It may be classified as direct when: 1. There is a direct relationship to the product through a process or a costing unit; 2. The cost may be measured in light of this relationship; and 3. The cost is significant in amount. The general rule is that direct employee cost is the labour spent in the actual production of the finished product which is economically identifiable with product costs. "Economically" means cost benefit ratio be looked into before going into a detailed exercise ascertaining direct employee cost. All factory employees cost other than for direct employees are classified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious jobs on some equitable basis. Inspection employee may be considered direct employee or indirect employee depending upon the circumstances. It is often considered direct employee in cases where each unit must be tested or measured to ascertain that the product meets predetermined specification as in the case of manufacture of drugs where each item must be tested to guard against error. Inspection should, in other cases be considered as indirect employee if inspection is done on an intermittent or selective basis. If inspector divides his time between two or more departments or jobs, proration of his wages may be accomplished more easily by treating them as indirect employee cost than by attempting to make a direct allocation through time tickets or time cards. The distinction between direct and indirect employee is necessary because direct employee efficiency is measured by the number of acceptable units completed, while the efficiency of other type of employee frequently has little relationship to the number of units produced. Therefore in the measurement of the efficiency of a particular worker, group of workers or a department, their employees must be divided, so far as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments and benefits, as applicable or any payment made on behalf of employee. This is also known as Labour Cost. Idle time: The difference between the time for which the employees are paid and the employees' time booked against the cost object. Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose. Indirect Employee Cost: The cost which cannot be directly attributed to a particular cost object. Marketing overheads: Marketing Overheads are also known as Selling and Distribution Overheads. Overtime Premium: Overtime is the time spent beyond the normal working hours which is usually paid at a higher rate than the normal time rate. The extra amount beyond the normal wages and salaries paid is called overtime premium. Production Overheads: Indirect costs involved in the production process or in rendering service. Selling Overheads: Selling Overheads, also known as Selling Costs, are the expenses related to sale of products and include all Indirect Expenses in sales management for the organization. Standard Cost: A predetermined cost of resource inputs for the cost object computed with reference to set of technical specifications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of employment lucrative so as to induce the employee to increase his efforts/productivity. The benefit goes to all the employees in the undertaking and is not limited to any individual, class, or group. For example: ♦ Free or subsidised food. ♦ Free or subsidised housing. ♦ Free or subsidised education to children. ♦ Free or subsidised canteen, crèches and recreational facilities. ♦ Free or subsidised conveyance. ♦ Leave travel concession. ♦ Any other free or subsidised facility. ♦ Recreational facilities ♦ Protective clothing, liveries, uniforms etc. ♦ Tea milk etc They are non-financial only so far as the employee is concerned, but the employer has to incur expenditure to provide for the incentives. The above payments to employees are ascertainable at the end of each month. In case of subsidized benefits, token money recovered from the employee is credited to the relevant benefit scheme. Net cost of benefits is allocated to the departments/cost centre on the basis of gross earning/number of employee or may be treated as overhead. There are group benefits extended to employees such as Group Person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day must include all of these elements where they exist. Hourly rates are to be calculated using the available hours as the denominator. Normal health breaks or rest allowances are excluded from available hours. In brief Employee cost includes remuneration paid or payable and provisions made for future payments. However the following payments to employees will not form part of employee cost: As per CAS-7.4.7, the employee cost will not include the compensation paid to employees for the past period on account of any dispute/court orders for the reason that there is no contribution by the concerned employee to the production activity of the entity during the current period. Such payments for past period are items of reconciliation between cost and financial accounts. Similarly as per explanation 3 of CAS-7.4.7, under provisions of prior period made up in current period shall not form part of employee cost in the current period and will be an item of reconciliation between cost and financial accounts. Employee cost does not include workers hired through contractor or agents as they are not on the roll of the entity and payments are made to the contractor and not to such workers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uneration is computed as a percentage of profits. Remuneration to officers, managers and executive director of a corporate body paid as a fixed amount or paid whole or part of the remuneration as percentage of profits will be treated as employee cost. Remuneration covers fixed salary, PF contribution, leave, superannuation and severance payment, and other benefits, besides commission, etc. Other benefits include free furnished residential accommodation or house rent allowance, leave travel concession, reimbursement of medical expenses for self and family, personal accident insurance, fully maintained company's car with driver, gardener, watchmen, electricity. Remuneration paid to managerial personnel will be identified as production, administrative or selling overhead on the basis of services provided by them. However remuneration paid to non-executive directors will be treated as Administrative Overheads. Salary paid to an owner in the case of sole proprietorships, and fixed salary paid to a working partner in the case of a partnership shall be treated as cost to be identified as production, administrative or selling overhead on the basis of services provided by them. 5.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, if any. Payment for such abnormal idle time is not included in costs and is charged to Costing Profit and Loss account. 5.7 Where Employee cost is accounted at standard cost, variances due to normal reasons related to Employee cost shall be treated as part of Employee cost. Variances due to abnormal reasons shall be treated as part of abnormal cost. Standard cost serves as a basis of cost control and as a measure of productive efficiency when ultimately posed with an actual cost. It provides management with a medium by which the effectiveness of current results is measured and responsibility for deviation is placed. Standard costs are used to compare the actual costs with the standard cost with a view to determine the variances, if any, and analyse the causes of variances and take proper measure to control them. When standard costing system is in vogue, there can be employee cost variance, besides material cost and other variances relating to usage of resources during the course of production. Variance is the difference between an actual amount and a target or planned amount. Variances may be due to normal or abnormal reasons. Variances due to normal reasons shall be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st that is not normally associated with a level of activity in existing circumstances. It is to be excluded if it is material and quantifiable. The materiality has not been defined in the standard. It will depend upon situation to situation. The rationale of exclusion is that inclusion of such items in the cost will make the cost not comparable with a normal situation. It shall not form part of cost of the production as not to distort the cost due to abnormal reasons. It is dealt with in the costing profit and loss account. 5.10 Penalties, damages paid to statutory authorities or other third parties shall not form part of the Employee cost. Penalties/damages are levied by statutory authorities or third parties for failure to comply or for late compliance with statutory/contractual requirements, such as non-payment of PF contribution in time, non-compliance with any labour legislation, and the like. Since penalties/damages are abnormal items of expense, it will not form part of the employee cost and will be an item of reconciliation with financial accounts. 5.11 The cost of free housing, free conveyance and any other similar benefits provided to an employee shall be determined at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for assignment of employee cost are the "time card" and the "Employee job ticket". A time card (clock card) is inserted in a time clock by the employee several times each day: upon arrival, going to lunch, taking a break, and when leaving for the day. By mechanically/biometrically keeping a record of total hours worked each day by employees, this procedure provides a reliable source for computing and recording total payroll costs by employee wise and cost centre wise. Depending upon process of production, employee job tickets are prepared daily by employees for each job worked on. Employee job tickets indicate the number of hours worked, a description of the work performed, and the employee's wage rate (inserted by the payroll department). The sum of the employee cost and hours for different jobs (as shown on employee job tickets) should be equal to the total employee cost and employee hours for the period (as shown on time cards). Time booked as Job tickets when multiplied by employee hour rate indicate the cost against jobs or production order or standing order Number as the case may be. (Standing order number is the sub-division of overhead cost for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of operation and the like. For example Employee Cost for generation of solar power is not significant in terms of product cost and forms part of overhead, but for subsidy requirement, it may be indicated separately. 6.3 Where the Employee costs are not directly traceable to the cost object, these may be assigned on suitable basis like estimates of time based on time study. Some employees work in such a manner that it is not possible to identify them with any cost centre or department. Their employee cost is to be assigned on technical estimates, such as factor hours for machine operator attending to more than one machine/ work study and the like. For example: In bulk drug industry workers attend to different equipments in a sequence. Degree of attention devoted to different process equipment varies and is therefore not in constant ratio to equipment hours. For this purpose some weights are pre-determined for different equipment. Allocations of employee cost are made on the basis of equipment hours after adjustments are made with such predetermined weights. Another example is of group benefits extended to employees such as Group Personal Accident Insurance, Group Medical Insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond the normal working hours which is usually paid at a higher rate than the normal time rate. The overtime premium is to be assigned in one of the following ways: ♦ Where the overtime working is caused by a "rush order" of the customer or other special requirement of a job, the overtime premium is assigned to the job or product. ♦ In all other cases, it is usual to treat the overtime premium as overheads and absorb the same as part of overheads. 6.7 Idle time cost shall be assigned direct to the cost object or treated as overheads depending on the economic feasibility and the specific circumstances causing such idle time. The Idle time is the difference between the time for which the employees are paid and the employees' time booked against the cost object. Idle time for reasons such as lunchtime, holidays, personal needs etc. are built in the cost per hour of an employee and it is a part of the employee cost for an object. Idle time cost (other than stated above) should be recorded as separate time on time ticket and standing code numbers established for this purpose. Idle time is to be assigned to the cost object to the extent economically feasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture will be obsolete as per new accounting standard. 2. Separation costs payable to employees. 3. Any abnormal cost excluded from employee cost. 4. Penalties and damages paid etc excluded from Employee cost. 5. Any Subsidy, Grant, Incentive and any such payment reduced from Employee cost. 6. The Employee cost paid to related parties. Related Party should be defined in the guidance note for appropriate disclosure 7. Employee cost incurred in foreign exchange. The above paragraph requires following disclosures to be made: If an entity undertakes any capital works or job internally, the cost of such jobs is to be capitalized. It includes material consumed, employee cost and overhead. Employee cost attributable to such jobs is to be capitalized and will not form part of cost of production. For example: During the current year, modernization of assembly line was carried out departmentally amounting to ₹ 50 lakhs, out of which ₹ 2 lakhs is for employee cost. Separation costs paid / payable during the period is to be disclosed indicating the basis adopted for charging off the cost. As detailed under paragraph 6.4, amortized separation cost is to be treated as indir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff posted in USA branch. 8.2 Any change in the cost accounting principles and methods applied for the measurement and assignment of the Employee Cost during the period covered by the cost statement which has a material effect on the Employee Cost. Where the effect of such change is not ascertainable wholly or partly the fact shall be indicated. The cost accounting principles and methods applied for the measurement and assignment of employee cost is to be followed consistently from one period to subsequent period and applied uniformly for different products and divisions. If there is any change in the cost accounting principles and methods during the period resulting in material effect on the cost, the same shall be disclosed indicating its impact in the cost statement. For example: Indirect employee cost was being assigned on the basis of direct labour hours to the products. During the year, the indirect employee cost has been identified by activity wise and assigned to the product on the basis of relevant activity drivers. Material handling employee cost has been assigned on the basis of material handled for each product. 8.3 Disclosures shall be made only where material, sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 90 45 5 40 4.7 D 300 255 85 15 5 15 5 15 5 DLH = Direct labour hour Maintenance = waiting for maintenance No Material = waiting for material Transport = Waiting for transport Annexure IV Examples of employee cost variance (rate, efficiency and mix): Standard and actual employee cost for a period is as under:- Standard Cost Actual Cost Item Hours Rate per hr Total Hours Rate per hr Total Hours produced 2000 40 80000 2800 28.00 78400 Direct employee cost Variance (Actual hrs × actual rate) - (standard hrs × standard rate) Variances calculation: Direct Employee cost variance: (Actual hrs × actual rate) - (standard hrs × standard rate) = (2800 × 28) - (2000 × 40) ₹ 1600 Favourable Employee Rate Variance: Actual hours (Standard rate - Actual rate) 2800 × (40 - 28) ₹ 33600 Favourable Employee Efficiency Variance Standard rate × (Standard hours - Actual hours) 40 × (2000 - 2800) ₹ 32000 Adverse Total employee Variance: (Employee Rate variance - Efficiency Variance) (Rs. 33600 Favourable - ₹ 32000 Adverse ) ₹ 1600 Favourable Employee Mix Varianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided. (f) Basic inefficiency of works due to low morale, insufficient training, faulty instructions etc. (g) Use of non-standard material requiring more or less operation time. Variances are to be analyzed. Normal variances will form part of the employee cost and abnormal variance will not form part of the employee cost. For example: Abnormal employee cost variance may be due to slow down tactics or waiting for material or breakdown of machinery. Annexure V CAS - 7 COST ACCOUNTING STANDARD ON EMPLOYEE COST The following is the COST ACCOUNTING STANDARD 7 (CAS - 7) issued by the Council of The Institute of Cost and Works Accountants of India on "EMPLOYEE COST". 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 Employee cost. 1.2 This standard deals with the principles and methods of classification, measurement and assignment of Employee cost, for determination of the Cost of product or service, and the presentation and disclosure in cost statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee Cost. 3. Short provisions of prior period made up in current period shall not form part of the employee cost in the current period. Employee cost includes payment made in cash or kind. For example: ♦ Employee cost ■ Salaries, wages, allowances and bonus/incentives. ■ Contribution to provident and other funds. ■ Employee welfare ■ Other benefits ♦ Employee cost - Future benefits ■ Gratuity. ■ Leave encashment. ■ Other retirement/separation benefits. ■ VRS/ other deferred Employee cost. ■ Other future benefits ♦ Benefits generally include ■ Paid holidays. ■ Leave with pay. ■ Statutory provisions for insurance against accident or health scheme. ■ Statutory provisions for workman's compensation. ■ Medical benefits to the Employees and dependents. ■ Free or subsidised food. ■ Free or subsidised housing. ■ Free or subsidised education to children. ■ Free or subsidised canteen, crèches and recreational facilities. ■ Free or subsidised conveyance. ■ Leave travel concession. ■ Any other free or subsidised f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference whether the whole or part of the remuneration is computed as a percentage of profits. Explanation: Remuneration paid to non executive directors shall not form part of Employee Cost but shall form part of Administrative Overheads. 5.4 Separation costs related to voluntary retirement, retrenchment, termination etc. shall be amortised over the period benefitting from such costs. 5.5 Employee cost shall not include imputed costs. 5.6 Cost of Idle time is ascertained by the idle hours multiplied by the hourly rate applicable to the idle employee or a group of employees. 5.7 Where Employee cost is accounted at standard cost, variances due to normal reasons related to Employee cost shall be treated as part of Employee cost. Variances due to abnormal reasons shall be treated as part of abnormal cost. 5.8 Any Subsidy, Grant, Incentive or any such payment received or receivable with respect to any Employee cost shall be reduced for ascertainment of cost of the cost object to which such amounts are related. 5.9 Any abnormal cost where it is material and quantifiable shall not form part of the Employee cost. 5.10 Penalties, damages paid to statutory authorities or other third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 7.2 Indirect Employee costs shall be presented in cost statements as a part of overheads relating to respective functions e.g. manufacturing, administration, marketing etc. 7.3 The cost statement shall furnish the resources consumed on account of Employee cost, category wise such as wages salaries to permanent, temporary, part time and contract employees piece rate payments, overtime payments, Employee benefits (category wise) etc wherever such items form a material part of the total Employee cost. 8 Disclosures 8.1 The cost statements shall disclose the following: 1. Employee cost attributable to capital works or jobs in the nature of deferred revenue expenditure indicating the method followed in determining the cost of such capital work. 2. Separation costs payable to employees. 3. Any abnormal cost excluded from Employee cost. 4. Penalties and damages paid etc excluded from Employee cost. 5. Any Subsidy, Grant, Incentive and any such payment reduced from Employee cost 6. The Employee cost paid to related parties11. 7. Employee cost incurred in foreign exchange. 8.2 Any change in the cost accounting principles and methods applied for the measurement and assignment ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
