Material Costs

_20160403_015031 Material Costs

(a) Proper records shall be maintained showing separately all receipts, issues and balances both in
quantities and cost of each item of raw material required for the production of goods or rendering of services under
reference.
(b) The material receipt shall 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 by the taxing authorities) that can be quantified with reasonable accuracy at the time of acquisition.
(c) Finance costs incurred in connection with the acquisition of materials shall not form part of material cost.
(d) Self-manufactured materials or captive consumption shall be valued including direct material cost, direct employee cost,
direct expenses, factory overheads, share of administrative overheads relating to production but excluding share of other
administrative overheads, finance cost and marketing overheads.
(e) Spares which are specific to an item of equipment shall not be taken to inventory, but shall be capitalized with the cost of
the specific equipment. Cost of capital spares or insurance spares, whether procured with the equipment or subsequently,
shall be amortised over a period, not exceeding the useful life of the equipment.
(f) Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall be
absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from
disposal.
(g) Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc., before the material is
received shall be absorbed in material cost to the extent they are normal, with corresponding adjustment in the quantity.
(h) The forex component of imported material cost shall be converted at the rate on the date of the transaction. Any
subsequent change in the exchange rate till payment or otherwise shall not form part of the material cost.
(i) Any demurrage or detention charges, or penalty levied by transport or other authorities shall not form part of the cost of
materials.
(j) Subsidy or Grant or Incentive and any such payment received or receivable with respect to any material shall be reduced
from cost for ascertainment of the cost of the cost object to which such amounts are related.
(k) Issues shall be valued using appropriate assumptions on cost flow, e.g. First-in-First-out, Last-in-First-out, Weighted
Average Rate. The method of valuation shall be followed on a consistent basis.
(l) Where materials are accounted at standard cost, the price variances related to materials shall be treated as part of material
cost.
(m) Any abnormal cost shall be excluded from the material cost.
(n) Wherever, material costs include transportation costs, determination of costs of transportation shall be governed by Determination of Cost of Transportation.
(o) Self-manufactured components and sub-assemblies or captive consumption shall be valued including direct material cost,
direct employee cost, direct expenses, factory overheads, share of administrative overheads relating to production but
excluding share of other administrative overheads, finance cost and marketing overheads.
(p) The material cost of normal scrap or defectives which are rejects shall be included in the material cost of goods
manufactured. The material cost of actual scrap or defectives, not exceeding the normal shall be adjusted in the material
cost of good production. Material Cost of abnormal scrap or defectives shall not be included in material cost but treated
as loss after giving credit to the realisable value of such scrap or defectives.
(q) Material costs shall be directly traced to a Cost object to the extent it is economically feasible or shall be assigned to the
cost object on the basis of material quantity consumed or similar identifiable measure and valued as per above principles.
(r) Where the material costs are not directly traceable to the cost object, the same shall be assigned on a suitable basis like
technical estimates.
(s) Where a material is processed or part manufactured by a third party according to specifications provided by the buyer,
the processing or manufacturing charges payable to the third party shall be treated as part of the material cost.
(t) Wherever part of the manufacturing operations or activity is subcontracted, the subcontract charges related to materials
shall be treated as direct expenses and assigned directly to the cost object.
(u) The cost of indirect materials shall be assigned to the various Cost objects based on a suitable basis such as actual usage
or technical norms or a similar identifiable measure.
(v) The cost of materials like catalysts, dies, tools, moulds, patterns etc., which are relatable to production over a period of
time shall be amortized over the production units benefited by such cost.
(w) The cost of indirect material with life exceeding one year shall be included in cost over the useful life of the material.

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