Cost Accounting Records Rules: Subject Matter and Classification

After reading this article you will learn about Cost Accounting Records Rules:- 1. Subject-Matter of the Cost Accounting Records Rules 2. Classification of the Cost Accounting Records Rules.

Subject-Matter of the Cost Accounting Records Rules:

The Companies (Amendment) Act of 1965, under its Section 209(1)(d), incorporates a provision that proper books of account in the case of companies engaged in production, processing, manufacturing or mining activities should include particulars relating to utilisation of material, labour or other items of cost as may be prescribed by the Central Government.

This provision is in addition to the information relating to all sums of money received and expended, all sales and purchases of goods, and assets and liabilities of a company. But this provision is not applicable to all companies straightway, and depends upon the Central Government who has been empowered to prescribe the rules for the purpose under Section 642 of the Companies Act, 1956.

So, the Cost Accounting Records Rules are framed and introduced by the Central Government in exercise of the powers conferred by Section 642(1) read with Section 209(1)(d) of the said Act in respect of a ‘product’ or a ‘class or products’, or an ‘industry’ or a ‘group of industries’.

In so far as the financial accounts of a company are concerned, the financial statements such as the Profit and Loss Account and the Balance Sheet and other Schedules forming parts of the accounts are uniform. But the Cost Accounting Records Rules are different for different industries and products.

This is due to the methods and processes of manufacture and the nature and extent of activities varying widely from product to product and even from industry to industry.

However, from the statutory point of view, a general pattern of the Cost Accounting Records Rules is discernible.

Classification of the Cost Accounting Records Rules:

The Rules are basically divided into three parts viz.:

First part—describes the rules, gives definitions, and mentions about the applicability and penalty clauses;

Second part—deals with Schedule I which describes the procedures to the followed in respect of each element of cost, and contains Proformae for utility services; and

Third part—that is, Schedule II prescribes the various Proformae for cost statements relating to the particular product(s) covered.

These are discussed below:

First Part:

(1) Short title and commencement:

This mentions about the name of the industry and the date when it becomes effective.

(2) Application:

This defines the scope of application, viz. the product—its classifi­cation and details, the industrial unit to which applicable, and the extent of exemption applicable for small-scale industrial undertakings.

(3) Maintenance of Records—the general provisions are as follows:

“Every company to which these rules apply shall, in respect of each of its financial years commencing on or after the commencement of these rules, keep proper books of account containing, inter alia, the particulars specified in Schedule I and Schedule II, annexed to these rules or in a form as near thereto as practicable relating to the utilisation of materials, labour and other items of cost in so far as they are applicable to ……………”.

Such books of account shall be kept so “as to make it possible to calculate the cost of production and cost of sales of products referred to in rule 2 at intervals of not less than 90 days during the financial year (hereinafter referred to as the relevant period) as well as for the financial year as a whole, from the particulars entered therein.”

Further, such books of account and the proformae specified in Schedule II shall have to be completed not later than 90 days of the close of the financial year of the company to’ which they relate.

The Rules cast upon the directors and officers, in terms of Sections 209(6) and 209(7) of the Companies Act, 1956, the duty to take all reasonable steps to secure compliance by the company with these provisions in the same manner as he is liable to maintain accounts under Section 209(1) of the Act.

The Rules stipulate that Statistical and other records shall have to be maintained in such a way so as to enable the company to exercise control over the various operations and cost’ with a view to achieve optimum economies in costs and provide the necessary data required by the Cost Auditor to suitably report on all the points referred to in the Cost Audit (Report) Rules, 1996.

Such records shall have to be reconciled with the returns submitted to the Excise Department, and Directorate General Technical Development and other authorities from time to time.

It is important to note that neither the Companies Act 1956 nor the relevant. Cost Accounting Records Rules provide for the extension of time limit (i.e. beyond 90 days) for the preparation of cost records and cost proformae (i.e. cost statements).

(4) Penalty:

This mentions that the company and every officer thereof shall be punishable with a fine up to Rs. 500, if the company contravenes the provisions relating to the maintenance of records. In case such contravention continues, a further fine up to Rs. 50 for every day after the first day is imposed.

Second Part:

That is, Schedule I contains the description of the procedures to be followed in respect of each element of cost, viz. Direct Materials, Raw Materials, Process’ Materials; Components and sub-assemblies; Consumable stores, small tools, dies and machinery spares; Wastages, spoilages and rejections; Wages and salaries including attendance; Utilities and services (power, steam, air, water, etc.); Workshop repairs and maintenance; Depreciation, Royalty, Technical know-how Fee; Other overheads—their apportionment; Conversion cost; Interest; Expenses/Incentives on export, packing; Work-in-progress and finished goods; Research and development expenses; Reconciliation of cost and financial accounts ; Cost variances adjustments in standard costing system, Inter­company transactions; Statistical data on operations, Records for capital assets, and the specimen Cost Proformae for the utilities, raw materials, essential inputs, and effluent treatment.

Third Part:

That is, Schedule II deals with specifically the various prescribed Cost Statements for the intermediate products obtained, cost-centre-wise conversion cost and allocation, cost of production, cost of sales, the value of work-in-progress at the beginning and end of the year, the finished stock statement both in quantity and value, summary costs of production/sales/Margin per unit and the allocation of total expenses and incomes of the company between the activity of the product(s) to which the rules apply and the other activities, etc.

It is to be noted that the Proformae are not uniform for all industrial products and they are different for certain products. Further, the special points which have been incorporated under the various proformae as ‘footnotes’ deserve special consideration by the company for their maintenance and preparation, and also by the Cost Auditor for his conducting cost audit in terms of the Cost Audit (Reports) Rules, 1996.