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Cas and Gacap

The document discusses the evolution of cost accounting principles from rules-based to standards-based approaches. It notes that early cost accounting principles were a mixture of rules and principles with many options, leading to a wide range in reported figures. It then describes the movement toward more codified and standardized principles through the establishment of rule-setting bodies and greater focus on underlying situations rather than rules. Finally, it discusses some considerations for developing cost accounting standards in the Indian context, including the need for true and fair cost reporting across diverse users.

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Muraliprasad Sa
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366 views21 pages

Cas and Gacap

The document discusses the evolution of cost accounting principles from rules-based to standards-based approaches. It notes that early cost accounting principles were a mixture of rules and principles with many options, leading to a wide range in reported figures. It then describes the movement toward more codified and standardized principles through the establishment of rule-setting bodies and greater focus on underlying situations rather than rules. Finally, it discusses some considerations for developing cost accounting standards in the Indian context, including the need for true and fair cost reporting across diverse users.

Uploaded by

Muraliprasad Sa
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
Download as pptx, pdf, or txt
Download as pptx, pdf, or txt
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Journey from Rules to Standards and Principles S.A.

Murali Prasad

The regime of Industry-wise Rules Contained nuggets of principles


Valuation of purchased materials Major repairs Cane from own farm Transfer of intermediate products Quantum of depreciation

Too few and far between Rules dealt mostly with records- as expected

SAM CAS and GACAP

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Generally Accepted Cost Accounting Principles (Practices?). A body of knowledge. Based on sound theory and refined from practice. Understood by practitioners. Not codified- until recently. Similar to GAAP before the era of accounting standards.

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Uncodified. When Codified, not more than a list (see Inventory of Generally accepted accounting principles by Paul Grady). A mixture of rules and principles. Too many options.

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Resultant reported figure can fall in a wide range. Leonard Spacek, former Chair of Arthur Anderson shocked the accounting world with a presentation in a CPA conference of a wide range of Net Income figures conforming to GAAP. Led to formation ofAccounting Principles Board in US. Options meant that GAAP were not generally accepted.
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Prompted by dissatisfaction with divergent values that statements conforming to GAAP produced. Standard practice is not the generally accepted, but the best practice. Options drastically cut in standards, almost always linked to underlying situations. Not rule based, but principle based. Product of a rigorous standard setting process.
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Set by an independent body (not all accountants) in which diverse interests are represented. Backed by a strong secretariat. Large resources committed to standard setting. Subject to periodic review eg Annual Improvement Project of IASB. Backed by legislative sanction.

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Need not felt globally since cost figures used primarily by management who set their own guidelines. Need felt for the first time when Government entered into cost-plus contracts for supply of goods and services. Thus the Cost Accounting Standards were born in the USA. Later extended to Educational Institutions in USA receiving Federal Grants. Also relevant in the case of Administered priceseg PPAs in India.
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At the time of setting up CASB, Prof. Robert Anthony wrote in Harvard Business Review an article with the above provocative title. He discussed the problems of standard setting in general and cost in particular. Those of us in CASB in India are experiencing some of them and some more unique to the Indian context.

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India has the unique institution of cost reporting under Cost Audit provisions. There is a general purpose cost statementProforma Cost Statements under the old Cost Audit Report and Para 5 under the new. There are diverse users for these There are also special purpose cost statements as in Cost Accounting Standards 4. Cost Standards in India have to meet these different purposes.
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While CASB in USA was concerned about allowability of cost, we are concerned more about true and fair view of cost. The Cost Accounting Standards in India must ensure true and fair view. Indian context is one of cost reporting and not cost determination. The user is not in a position to demand more information as a party to a bilateral negotiation can.
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Management is mandated by CARR to follow cost standards in maintaining statutory cost records. Management must go further and incorporate them in contracts for supply of goods and services on cost plus basis with such modifications as required. Management must develop cost standards for internal reporting of costs for performance appraisal and decision making.
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Cost of materials, consumable stores, spares, manpower, equipment usage, utilities, and other resources used

Distribution cost
Overheads

Administrative overheads
Overheads

Selling Overheads

In - house Inter Unit Transfers Inter Company Transfers Service to Outside Parties

Inter Unit Transfers Inter Company Transfers Service to Outside Parities

Inter Company Transfers Service to Outside Parties

Sale to Outside Parities

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Cost of Service Rendered by Contractors

Within Facilities of the entity

At their premises

Charges payable to contractors + Cost of materials, consumable stores, spares, Manpower, equipment usage, utilities and other resources provided to contractors

Determined at Invoice or Agreed price + Taxes + Other Attributable Costs Tax Credits +Cost of other resources provided to contractors

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Primary Distribution of OH

Primary apportionment of production overheads to various cost centers is done on the basis of following two principles: Cause and Effectc Benefits received Once the base is selected, it should be followed consistently and uniformly. Change in the basis can be adopted only when it is considered necessary like due to change in technology, degree of mechanization, product mix etc.

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Application Guidance for various Cost Accounting Standards is at various stages of completion. They explain, amplify, illustrate and address issues of implementation. They obviously cannot go against the principles stated by the Cost Accounting Standards.

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