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GUIDANCE NOTE ON COST ACCOUNTING STANDARD ON PACKING MATERIAL COST (CAS-9)

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..... activities have to maintain cost accounting records in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute, to the extent these are found to be relevant and applicable. The above Rules further provides that these will be applicable to companies wherein aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or wherein 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 wherein 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 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. The Cost Accounting Standards have been set in bo .....

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..... duct depend upon the nature of the product to be packed. Illustrative list of packing material used is at Annexure I. It varies from industry to industry as items to be packed will be different as indicated in Annexure II. Packing Material is classified under a common designation on the basis of similarities of nature, attribute, source of supply and the like. For example Wooden crates, Aluminium foil, paper bag, gunny bags, HDPE bags, Glass, plastic bottles, closures (metal/plastic rubber) and the like. On the basis of source of supply, packing materials are classified as indigenous materials/imported materials. Indigenous packing materials are manufactured within the country and imported packing materials are purchased from other countries. For the purpose of this standard Packing Materials are classified into primary and secondary packing materials. Primary Packing Material are for holding the product, keeping the contents clean, fresh, sterile and safe for the intended shelf life and sale. Primary packing material required for a product will depend upon the type of the product to be packed. For example for pharmaceutical industry primary packing material will be .....

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..... inked with the cost object other than direct material or direct employee cost. 4.6 Direct Materials: Materials the costs of which can be attributed to a cost object. 4.7 Distribution Overheads: Distribution overheads, also known as Distribution Cost, are the costs incurred in handling a product from the time it is ready for despatch until it reaches the ultimate consumer. 4.8 Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. 4.9 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose. 4.10 Marketing overheads: Marketing Overheads comprises selling overheads and distribution overheads. 4.11 Packing Materials: Materials used to hold, identify, describe, store, protect, display, transport, promote and make the product marketable and communicate with the consumer. 4.11.1 Defectives: Packing materials that do not meet quality standards. This may include reworks or rejects. 4.11.1.1 Reworks: Defectives which can be brought up to the standards by putting in additional resources. 4.11.1.2 Rejects: Defectives which cannot meet the quality standards even after putting in additional r .....

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..... tc. In addition to basic purchase price, duties and taxes, freight inwards, insurance and other expenditure directly attributable to procurement are to be taken into account while valuing the receipt of packing material if these can be quantified with reasonable accuracy at the time of receipt. If any of these items of expenditure cannot be quantified with reasonable accuracy, these are treated as material handling cost, an item of overhead. Trade/cash discount, rebates, taxes and duties refundable (or to be credited by the taxing authorities) are to be set off. Examples of taxes and duties to be deducted from cost are CENVAT credits, credit for countervailing customs duty, sales tax set off/VAT credits and other similar items of credit recovered/recoverable. Imported Packing Material: Packing Materials are imported from other countries depending upon the availability in the country/economics of import. Import license may be required in certain cases. Terms of Purchase inter alia may be FOB, CIF port/airport. FOB (Free on Board) means that goods are loaded on the ship and there is no additional charge relating to loading and the like. Purchaser has to pay transit insu .....

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..... rial cost. Cost incurred for acquisition, inspection, storage, movement of materials and insurance is also to be assigned to packing material cost on rational basis. Handling costs up to works/factory gate If handling cost is specific and handled singly, it is to be assigned to the packing material handled. If employees are used for handling the packing material, it is to be treated as procurement overheads and not included in Packing Material Cost. In other cases where handling charges are included in the carrier's responsibility, there will be no assignable cost due to handling. Incoming Inspection If the packing material calls for inspection by a third party, specific cost will be assigned to the packing material inspected. If the inspection is carried out internally with own employees, it is to be treated as procurement overheads and not included in Packing Material Cost. If the inspection is part of the vendor's responsibility, no separate inspection cost will be assigned. Other cost incurred for packing material acquisition is insuring of packing material. If insurance premium is specific and insured singly, it is to be assigned to the specific p .....

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..... xpenditure (net of trade discounts, rebate, taxes and duties refundable or to be credited) as detailed under paragraph 5.1.1. Direct employee cost is that portion of wages and salaries which can be identified with and charged to a cost object. Direct Employees engaged in the manufacturing of packing material are to be identified. Remuneration paid to them and share of other employee related cost are to be determined as per Standard CAS-7 on Employee cost. Direct Expenses specifically identifiable with the production of packing material (for example job charges, hire charges for use of specific equipment, cost of special designing of packing material or drawings etc.) shall form part of the cost of self manufactured packing material. Factory overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object in an economically feasible way. these are the indirect costs incurred in the production process or in rendering service. The Factory overheads includes administration cost relating to production, factory or manufacturing. 5.1.4 The valuation of captive consumption of packing mat .....

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..... the transport agency or any authority shall not form part of the cost of packing materials. Demurrage and penalties are levied by the transport agency or any other authority such as custom authorities for delay in clearance of wagon/vessel and the like. Illustrations are: Demurrages levied by transporter for not removing goods, Penalties for keeping hazardous goods in unauthorized places in transit without proper safeguards. Penalties or interest levied by custom authorities for delayed clearance. Demurrage and penalties are abnormal cost and are not part of the packing material cost. It is taken to reconciliation. 5.1.8 Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to packing material shall be reduced for ascertainment of the cost to which such amounts are related. Subsidy and grant received should be recognized on a systematic basis. These should be matched with the related cost for which these are intended to compensate. Subsidy received for any packing material is to be reduced from the packing material cost. Subsidy receivable for using specific packing materials produced on account of environmental reas .....

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..... signed to the specific packing material transported. 5.4 Packing Material Costs shall not include imputed costs. However in case of Cost of Production of Excisable Goods for Captive Consumption the computation of cost shall be as per CAS 4. Imputed cost does not involve any cash outlay and is relevant for decision making purpose viz whether to use reusable packing material or not. This will not form part of the packing material cost. But if any excisable goods produced is used for captive consumption, its cost is to be determined as per CAS-4. Under CAS-4 in case packing material is supplied free of cost by the user of the captive product the landed cost of such material shall be included in the cost of production. 5.5 Where packing materials are accounted at standard cost, the price variances related to such materials shall be treated as part of packing material cost and the portion of usage variances due to normal reasons shall be treated as part of packing material cost. Usage variances due to abnormal reasons shall be treated as part of abnormal cost. The standard cost serves as a basis of cost control and as a measure of productive efficiency when ultimately posed .....

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..... l cost. It is to be excluded from cost of packing material cost of the product. Any realization from disposal of such rejected packing material is to be credited to the abnormal cost. The rationale of exclusion of abnormal cost is that such items in the cost will make the cost not comparable with a normal situation. Such an aberration is avoided to understand the cost in a better perspective for any purpose. For instance, loss of packing material due to major fire accident is to be treated as Abnormal Cost. It shall not form part of cost of the packing material consumed as not to distort the cost due to abnormal reasons. It is dealt with in the reconciliation with financial accounts. 5.8 The credits/recoveries in the nature of normal scrap arising from packing materials if any, should be deducted from the total cost of packing materials to arrive at the net cost of packing materials. Normal Loss occurs in use of different packing material such as in cutting wood and cardboard to make box and crate. Adjustment shall be made to the cost of packing material for credits/recoveries from sale of such scrap. CHAPTER 4 ASSIGNMENT OF COST 6.1 Assignment of packing mate .....

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..... sed on physical stock taking of packing materials in stock in the packing department at periodic intervals. Quantity of packing material consumed so arrived at can be valued either at standard rate or actual rate depending on the cost system in vogue in the Company. The norms regarding the quantity of packing materials required for each product is stored either as part of the standard bill of materials relating to the product or in a separate bill of packing materials. Packing material cost may also be assigned on the basis of standard bill of packing material in place of actual issues. Under this method packing material is issued as Standard Bill of material. The standard cost for each item of packing material is defined at the beginning of the year. The variances from standard on account of price and consumption are adjusted to consumption at suitable interval. Any variation between the actual issues (both quantity and value) and the standard as accumulated over the period is charged off to consumption. For tracing of packing material cost direct to a cost object, concept of to the extent economic feasible is also to be taken into account. This requires an exercise to .....

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..... are depreciated over its useful life and any repair and depreciation will form packing material cost. While arriving at the cost of reusable packing material, the cost of freight and other costs attributable to activities associated to make the packing material reusable like minor repair cost, storage cost of these material, manpower dedicated for this activity shall identified and forms part of the packing material cost. 6.4 Cost of primary packing materials shall form part of the cost of production. Primary packing material has been defined under paragraph 4.11 of the CAS-9. These materials are essential to hold the product and bring it to a condition in which it can be used by or sold to a customer. Primary packing materials are of various types and their use varies with industry to industry. For example: - Pharmaceutical industry: Insertions related to product, Foils for strips of tablets/capsules, vials. - Industrial gases: Cylinders/bottles used for filling the gaseous products. The cost of primary packing material used for a product shall form part of the cost of production. 6.5 Cost of secondary packing materials shall form part of distribution ove .....

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..... ty (Nos.) Rate Amount Cost Per unit 1 Packing material Cost 1.A Primary Packing Cost (i) Primary packing material Wrapper Boxes (ii) Others 500 1.00 500 (Such as gum, tape, string etc.)......... 50 5.00 250 1.B Secondary Packing cost Secondary Packing Material Card Box 5 20 100 Others It is advisable to provide previous year's figures against cost per unit. Type of packing use .....

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..... oot note. The State Government has been subsidizing using of jute/paper bags in place of pvc bags for environmental reasons. Subsidy received and receivable are reduced from the cost of packing material. 8.1.6 Credits/recoveries relating to the Packing Materials Costs. If any credit or recovery is considered while determining the cost of packing material, the same shall be disclosed in the cost statement e.g. sale of empties returned by customers. 8.1.7 Any abnormal cost excluded from Packing Materials Costs. Abnormal cost is to be excluded from the cost of packing material as the same has not contributed to the packing cost of the cost object. Disclosure is to be made. For example: During the year there was fire resulting in loss of packing material valued at ₹ 2.5 lakhs. The same has been excluded from the cost of packing material. 8.1.8 Penalties and damages paid etc. excluded from Packing Materials Costs. 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. 8.2 Any change in the cost accounting principles and met .....

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..... enerally preferred in white or silver coloured wood, softwood can be used instead of hardwood, which is heavier, Cardboard/corrugated boxes These are usually made out of corrugated fiberboard. If more protection is needed, double-walled boxes can be used. Cardboard/corrugated boxes are cheaper to manufacture and easier to handle than the traditional wooden crates. Different types of material used for packaging: Aerosols, Bottles. Cans, Foils, Lids, Bottle Caps, Closures Packaging Bags, Packaging Boxes, Packing Sealing Tapes, Plastic Packaging Materials, Tear Tapes Thermocol, Tin can, tin Containers, Jumbo Bags, Gunny Bags, polythene bags. Bulk Bags and Sacks, Packaging Bags, Laminated Bags and Zip Bags Lids, Bottle Caps, Closures, Corks Packaging Seals Other Miscellaneous Packaging and Lamination Material Packaging Lamination Films, Foils, Sheets, Rolls Wrappers, Packaging Boxes, Crates, Cartons, Pallets Trays, Packaging Pouches, Sachets, Envelopes and Zipper Pouches, Packaging Tubes, Cans, Bottles, Jars Containers, Box, Case, Tray and Carton, Box boards, Linerboards, Corrugate .....

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..... ealants Adhesive, Non-Adhesive Pressure Sensitive Vacuum, Skin, Blister Thermoform Packaging Banding Bundling Material Sticker Labelling, Marking Insertions Packing material may be classified as primary packing material or secondary packing material depending upon its use. But certain packing materials having a characteristics of primary packing material are classified as raw material based on industry practice .For example Primary enclosure of: Sterile Injection Home carry pack of ice cream/shri kand Ink/colours for drawing Repellent liquid for mosquitoes and the like. ANNEXURE II Details of packing materials used in different industries Food Packaging Bakery items, dairy products, confectionary, snacks, frozen items, ice creams-food packaging foils, food packaging laminates, flexible packaging foils, cookies packaging, cracker packaging, bread packaging material, chips packaging, chocolate packaging, wafer packaging, namkeen packaging, pastry packaging, toffee wrappers, lo .....

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..... xt 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 Packing Material Cost. 1.2 This standard deals with the principles and methods of classification, measurement and assignment of Packing Material Cost, for determination of the cost of product, and the presentation and disclosure in cost statements. 1.3 Packing Materials for the purpose of this standard are classified into primary and secondary packing materials. 2. Objective The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the packing material cost with reasonable accuracy. 3. Scope This standard should be applied to cost statements, which require classification, measurement, assignment, presentation and disclosure of Packing Material Cost 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 .....

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..... an adjustment to the interest costs 7 . The terms Finance costs and Borrowing costs are used interchangeably. 4.9 Imputed Costs: Hypothetical or notional costs, not involving cash outlay, computed for any purpose. 8 For example: packing material supplied by the customer. 4.10 Marketing overheads: Marketing Overheads comprises selling overheads and distribution overheads. 4.11 Packing Materials: Materials used to hold, identify, describe, store, protect, display, transport, promote and make the product marketable and communicate with the consumer. 4.11.1 Defectives: Packing materials that do not meet quality standards. This may include reworks or rejects. 9 4.11.1.1 Reworks: Defectives which can be brought up to the standards by putting in additional resources. 10 Rework includes repairs, reconditioning and refurbishing. 4.11.1.2 Rejects: Defectives which cannot meet the quality standards even after putting in additional resources. 11 Rejects may be disposed off as waste or sold for salvage value or recycled in the production process. 4.11.2 Packing Material Cost: The cost of material of any nature used for the purpose of packing of a produc .....

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..... d costs are also used for estimation. 5. Principles of Measurement 5.1 Principle of valuation of receipts of packing material: 5.1.1 The packing material receipts should be valued at purchase price including duties and taxes, freight inwards, 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 at the time of acquisition. Examples of taxes and duties to be deducted from cost are CENVAT credits, credit for countervailing customs duty, sales tax set off/vat credits and other similar items of credit recovered/recoverable. 5.1.2 Finance costs directly incurred in connection with the acquisition of Packing Material shall not form part of Packing Material Cost. 5.1.3 Self manufactured packing materials shall be valued including direct material cost, direct employee cost, direct expenses, job charges, factory overheads including share of administrative overheads comprising factory management and administration and share of research and development cost incurred for development and improvement of existing process or product. 5.1.4 The valuation o .....

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..... The credits/recoveries in the nature of normal scrap arising from packing materials if any, should be deducted from the total cost of packing materials to arrive at the net cost of packing materials. 6. Assignment of Cost 6.1 Assignment of packing material costs to cost objects: Packing material costs shall be directly traced to a cost object to the extent it is economically feasible. 6.2 Where the packing material costs are not directly traceable to the cost object, these may be assigned on the basis of quantity consumed or similar measures like technical estimates. 6.3 The packing material cost of reusable packing shall be assigned to the cost object taking into account the number of times or the period over which it is expected to be reused. 6.4 Cost of primary packing materials shall form part of the cost of production. 6.5 Cost of secondary packing materials shall form part of distribution overheads. 7. Presentation 7.1 Packing Materials shall be classified as primary and secondary and within this classification as purchased -indigenous, imported and self manufactured. 7.2 Where separate cost statements are prepared for packing costs, the cost o .....

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