Elements of cost of production :
As per CAS-4, Cost of Production shall consist of material consumed, direct wages and salaries, direct expenses, works overheads, quality control cost, research and development cost, packing cost, administrative overheads relating to production. To arrive at cost of production of goods dispatched /used for captive consumption, adjustment for stock of Work-in-process, finished goods, recoveries of sales of scrap, wastage etc. shall be made.
Material cost shall be net of discounts, input tax credit, sales tax VAT (if any) etc.
This is correct as per costing principles, since material cost does become lower if credit of duty paid is obtained.
The research and development cost incurred for development and improvement of the process of existing product shall be included in the cost of production. Administrative overheads in relation to activities other than manufacturing activities e.g. marketing, projects management, corporate office expenses etc. shall be excluded from cost of production. – – If product is transferred/dispatched duly packed for captive consumption, cost of
such packing shall be included. – – Packing cost includes both cost of primary and secondary packing required for transfer/dispatch of the goods used for captive consumption.
Analysis of overheads for cost of production – Overheads shall be analysed into variable overheads and fixed overheads. The variable production overheads shall be absorbed in production cost based on actual capacity utilisation. The fixed production overheads and other similar items of fixed costs such as quality control test, research and development costs, administrative overheads relating to manufacturing shall be absorbed in the production cost on the basis of the normal capacity or actual capacity utilisation of the plant, whichever is higher. – – Normal capacity is the production achieved or achievable on an average over a period or a season under normal circumstances taking into account the loss of capacity resulting from planned maintenance. (Cost Accounting Standard for Capacity Determination – CAS-2).
In Phamasia v. CCE 2004 (173) ELT 481 (CESTAT), it was held that other works overheads as shown in cost audit report are includible in assessable value.
Valuation of WIP – Stock of work-in-progress shall be valued at cost on the basis of stages of completion as per the cost accounting principles. Similarly, stock of finished goods shall be valued at cost. In case the cost for a shorter period is to be determined, where the figures of opening and closing stock are not readily available, the adjustment of figures of opening and closing stock may be ignored. (In my opinion, as per excise principles, goods are to be assessed at the time of removal. Hence, costing has to be ‘future cost’ i.e. cost for next quarter/half year. The cost is to be calculated on the basis of projected costs, projected production etc. In such case, the question of opening and closing stock of WIP or finished goods does not arise at all. Question of opening and closing stock of WIP/FG arises only in case of past costs i.e. historical cost. For purpose of Central Excise, valuation is required to be done on future cost basis).
Joint products, scrap and waste – A production process may result in more than one product being produced simultaneously. In case joint products are produced, joint costs are allocated between the products on a rational and consistent basis. In case of by-products, the net realizable value of by-products is credited to the cost of production of main product.
The production process may generate scrap or waste. Realised or realizable value of scrap or waste shall be credited to the cost of production. (Thus, practically, scrap or waste is treated as a by-product). – – In case of any input material, whether of direct or indirect nature, including packing material 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. – – The amortised cost of such items shall be included in the cost of production.
ZInterest and finance charges to be excluded – Interest and financial charges being a financial charge shall be considered to be part of cost of production – noted in S Kumar Ltd. v. CCE (2007) 211 ELT 405 (CESTAT) – also noted and confirmed in Nirma Ltd. v. CCE 2006 (200) ELT 213 (CESTAT) * Hindustan Zinc v. CCE (2011) 273 ELT 405 (CESTAT) * Swaraj Foundry Division v. CCE (2012) 284 ELT 689 (CESTAT) * CCE v. Nirma Ltd. (2015) 325 ELT 232 (SC).
Abnormal costs to be excluded – Abnormal and non-recurring costs are those arising due to unusual or unexpected occurrence of events, such as heavy break down of plants, accident, market conditions restricting below normal level, abnormal idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment compensation, lay off wages etc. These abnormal costs shall not form part of cost of production.
Abnormal and non-recurring costs are not includible in assessable value – Vaigai Thread Processors P Ltd. v. CCE 2006 (202) ELT 88 (CESTAT).
Unabsorbed overheads referable to abnormal idle capacity for lack of orders shall not form part of cost of production – ITC Ltd. v. CCE (2015) 315 ELT 143 (CESTAT).
Outward transportation cost not includible – In Blue Star Ltd. v. CCE 2006 (200) ELT 108 (CESTAT), it was held that cost of transportation of final product is not includible in costing.
Depreciation to be added – This standard as well as CAS-1 (Classification of Cost) and CAS-3 (Overheads) make it clear that depreciation is required to be treated as ‘Overhead’.
Technical knowhow (royalty) charges includible even if parts captively consumed – Technical knowhow charges relating to parts is includible even if parts are captively consumed, as per CAS-4 – Otis Elevator Co. v. CCE (2012) 280 ELT 531 (CESTAT).