1. CAS 3 __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 1

2. It is to prescribe methods of collection, allocation, apportionment of overheads to different cost centres and absorption thereof to products or services on a consistent and uniform basis in the preparation of cost statements and to facilitate inter-firm/intra- firm comparison. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 11/10/2011 2

3. The standard shall be applied in Cost and Management Accounting practices relating to: A) Cost of products, services or activities B) Valuation of Stock C) Transfer pricing D) Segment Performance E) Excise / Customs duty, VAT, Income Tax, Service Tax and other levies, duties and abatement fixation F) Cost statements for any other purposes. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 3

4. The standard should be followed for treatment of overheads by all enterprises including companies covered under Cost Accounting Record Rules issued in pursuant to Sec.209(1)(d) of the Companies Act,1956 or under the provisions of any other Act, Rules and Regulations. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 4

5. 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. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 5

6. Overheads are to be classified on the basis of Functions; viz.,- Production Overheads- Administrative Overheads- Selling Overheads- Distribution Overheads __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 6

7. Overheads may also be classified on the basis of behaviour such as variable overheads, semi-variable overheads and fixed overheads. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 7

8. Any items of overheads arising out of abnormal situation in business activity should not be treated as overheads. They are charged to Costing Profit & Loss Account. Items not related to business activities such as donation, loss of profit on sale of assets etc. are not to be treated as overheads. Borrowing cost and other financial charges including foreign exchange fluctuations will not form the part of overheads. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 8

9. Collection of overheads means the pooling of indirect items of expenses from books of account and supportive/corroborative records in logical groups having regards to their nature and purpose. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 9

10. Allocation of overheads is assigning a whole item of cost directly to a cost centre.- An item of expense which can be directlyrelated to a cost centre is to be allocated to thecost centre. For example, depreciation of aparticular machine is directly to be allocated toa particular cost centre if the machine is directlyattached to that cost cventre. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 10

11. Apportionment of overhead is distribution of overheads to more than one cost centre on some equitable basis.- When indirect costs are common to differentcost centres, these are to be apportioned to thecost centres on an equitable basis. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 11

12. First Step is to apportion the overheads to different cost centres Second Step is to apportion the cost of service cost centres to production cost centres on an equitable basis. The first step is primary distribution and the second step is termed as secondary distribution of overheads. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 12

13. Absorption of overheads is charging of overheads from cost centres to products or services by means of absorption rate for each cost centre which is calculated as Overhead absorption rate = Total Ohs of Cost Centre Total quantum of base. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 13

14. Overheads are to be apportioned to different cost centres based on two principles: i) Cause and Effect Ii)Benefits received __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 14

15. Basis of primary apportionment of items of production overheads is to be selected to distribute them among the cost centres following the principles given in earlier slide. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 15

16. Item of cost Basis of ApportionmentPower HP rating of Machines x hours x LFFuel Consumption of rate x hourJigs, tools & fixtures Machine hours or Man hoursCrane hire charges Crane hours or weight of materials handeledSupervisors sal & Benefits Number of employeesLabour welfare cost Number of employeesRent & rates Floor or space areaInsurance Value of Fixed AssetsDepreciation Value of Fixed Assets __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 16

17. Secondary Distribution of overheads may be done by following either Reciprocal basis or Non-Reciprocal Basis. Reciprocal basis considers exchange of service among service departments Non Reciprocal basis considers only one directional service flow. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 17

18. Repeated Distribution Method Trial & Error Method Simultaneous Equation Method __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 18

19. The proportion at which the costs of a service cost centres to be distributed to production cost centres and other service cost centres is determined. Costs of first service cost centres are to be apportioned to production cost centres and service cost centres in the proportion as determined in step above. Similarly the cost of other service cost centres are to be apportioned. This process as stated in above steps are to be continued till the figures remaining undistributed in the service cost centres are negligible small. Any small amount left with service centre may be distributed to prduction cost centres. __________________________________ _M KAMESWARA RAO COST ACCOUNTANT 19

20. Production Departments Service Departments Machine Assembl Finishing Stores Repair yApportionmen 50% 20% 15% 15%t of StorescostApprtment. of 40% 35% 15% 10%RepairPrimary 35500 31900 14800 5000 6000distribtn.Stores Dept. 2500 1000 750 -5000 750Repairs 2700 2363 1012 675 -6750Stores Dept. 338 135 102 -675 100Repairs 40 35 15 10Stores 5 2__________________________________ 1.5 1.5 _M KAMESWARA RAO COST ACCOUNTANT 20