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 ..... he 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 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 ICW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. Productivity linked or other efficiency related bonus including bonus payment 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Act. (b) Statutory provisions for workman's compensation: In case a personal 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, cr ches 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 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme is introduced providing a lump sum payment for the remaining year 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... job may entail too much clerical detail and the employee cost may be allocated to various 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 partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an enterprise (including temporary, part time and contract employees). Consideration includes wages, salary, contractual payments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its in the form of amenities or facilities which do not offer cash reward to the employee for any specific or measured work done. Such non monetary benefits make the working conditions and 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, cr ches 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o cost centre/cost object shall be on the basis of number of employees or employee cost. Employee Rate per Hour The measure of cost to keep an employee at work an hour or a 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Executive Directors on the Board and other officers of a corporate body under a statute will be considered as part of the Employee Cost of the year under reference whether the whole or part of the remuneration 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, power failures, non-availability of material, lock out, atmosphere conditions, flood etc. It is abnormal idle time lost and is not part of the cost object. However, it shall be analysed cause wise as per Annexure III for corrective action, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l process loss, strike, or lock-outs, fire, flood, storm, or other similar causes. Payment made to employees for time lost due to fire and natural calamities are abnormal employee cost. It not considered in the cost of production and charged to Costing profit loss account. It is the cost 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentation of cost statement. CHAPTER 4 ASSIGNMENT OF COST 6.1 Where the Employee services are traceable to a cost object, such employees' cost shall be assigned to the cost object on the basis such as time consumed or number of employees engaged etc. or similar identifiable measure. Documents commonly used 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 equa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the machines attended by them, it is usual to log such time separately against maintenance work orders and treat the same as Repairs and Maintenance Cost. 6.2 While determining whether a particular Employee cost is chargeable to a separate cost object, the principle of materiality shall be adhered to. CAS 7 provides that the principle of materiality shall be kept in view while assigning a particular cost to a separate cost object. Materiality and significance of a piece of information depends on nature, size 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 exampl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Candidates evaluation (iv) Interviewing, including travel and substance (v) Placement agency cost (vi) Induction training /orientation programme etc. Cost incurred in regard to above activities is to be treated as overhead and assigned to the cost object on appropriate basis, such as number of employee recruited department wise. 6.6 Overtime premium shall be assigned directly to the cost object or treated as overheads depending on the economic feasibility and the specific circumstance requiring such overtime. Overtime premium is the time spent beyond 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (category wise)etc wherever such items form a material part of the total employee cost. Direct employee cost is to be exhibited as a separate item in the cost statement as per CAS 7. CHAPTER 6 DISCLOSURES The following information should be disclosed in the cost statements dealing with determination of employee cost. 8.1 The cost statements shall disclose the following: 1. Employees 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. The concept of deferred revenue expenditure 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 enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 1961 . If any employee cost is paid to related parties, its relationship, nature of transaction viz. amount and other terms / conditions relating to employee cost 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: A is holding company of B Company. Employees of B Company attended training programme conducted by A Company. Share of training cost paid to A is ₹ 1 lakh. Employee cost incurred in foreign exchange: Any paid in foreign exchange relating to employee cost is to be disclosed in foreign currency. For example: A sum of US$ 500000/- has been paid as salary to staff 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total working days Basic Basic Provident Fund Employee Number No. of days present Dearness allowance Dearness allowance E.S.I. Employee Name Weekly off House rent allowance House rent allowance L.I.C. Father's Name Holidays Transport Allowance Transport Allowance Income tax Grade Casual Leave Wash Allowance Wash Allowance House rent Bank Account Number Earned leave / PL Medical Allowance Medical Allowance Provident Fund Loan PF Number Medical Leave Special Site allowance Special Site allowance Others FPS Number Special leave Education allowance Education allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of taking more or less time than the standard for the performance of an operation or process Reasons for variance are: (a) Lack of proper supervision (b) Poor working conditions (c) Delays due to waiting for materials, tools, instructions etc if not treated as idle time. (d) Defective machines, tools and other equipment (e) Work on new machines requiring less time than provided. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees). Consideration includes wages, salary, contractual payments and benefits, as applicable or any payment made on behalf of employee. This is also known as Labour Cost. 6 Explanation : 1. Contract employees include employees directly engaged by the employer on contract basis but does not include employees of any contractor engaged in the organisation. 2. Compensation paid to employees for the past period on account of any dispute/court orders shall not form part of Employee 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. ■ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1 Employee Cost shall be ascertained taking into account the gross pay including all allowances payable along with the cost to the employer of all the benefits. 5.2 Bonus whether payable as a Statutory Minimum or on a sharing of surplus shall be treated as part of employee cost. Ex gratia payable in lieu of or in addition to Bonus shall also be treated as part of the employee cost. 5.3 Remuneration payable to Managerial Personnel including Executive Directors on the Board and other officers of a corporate body under a statute will be considered as part of the Employee Cost of the year under 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or treated as overheads depending on the economic feasibility and the specific circumstance requiring such overtime. 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. Cost of idle time for reasons anticipated like normal lunchtime, holidays etc is normally loaded in the Employee cost while arriving at the cost per hour of an Employee/a group of Employees whose time is attributed direct to cost objects. 7 Presentation 7.1 Direct Employee costs shall be presented as a separate cost head in the cost statement. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
