Cost Accounting
Standard 6:
Introduction
Definition: CAS 6 establishes principles for measuring and assigning
material costs in cost accounting.
Objectives:
Ensure uniformity and accuracy in material cost determination.
Improve cost control and decision-making in businesses.
Provide transparency in cost reporting and compliance with regulatory
bodies
Applicability:
Relevant for industries like manufacturing, construction, and
pharmaceuticals where material cost is a key component.
Elements of Material Cost: Key Types of Mater
A. Raw Materials B. Semi-finished Goods Consumable Stores & Spares
Basic materials used to make a Partially processed materials that need Materials used for production and
product. Example: Wood for furniture, more work. Example: Fabric before it maintenance but not part of the final
cotton for clothes. becomes a shirt. product. Example: Machine oil, tools,
spare parts.
Material Cost Components
Basic Cost
The actual purchase price of raw materials paid to the
supplier, forming the foundation of material cost.
Freight & Transport
Expenses incurred to move materials from the supplier to the
production site, including shipping, loading, and unloading
costs.
Duties & Taxes
Non-refundable charges like import duties, GST, and other
government levies applicable on material purchases, directly
impacting the total cost.
Valuation Methods:
Optimizing Inventory
Management
FIFO (First In, First Out)
The oldest materials are used first, ideal for items that expire, like food
and medicine, ensuring freshness and minimizing waste.
LIFO (Last In, First Out)
The newest materials are used first, beneficial for industries where prices
change often, like fuel, reflecting current market costs.
Weighted Average Cost
The total cost of all materials is averaged, helping keep pricing stable
and fair, smoothing out fluctuations in material costs.
Material Variance Analysis
Material Price Variance Material Usage
Variance
Happens when the price of
materials changes, impacting Happens when more or less
production costs. Example: If material is used than planned,
steel prices go up, production affecting overall expenses.
costs increase. Example: Using extra fabric in
clothing production increases
costs.
Disclosure Requirements
under CAS 6
1 Material Cost Valuation Method
Companies must disclose whether they use FIFO, LIFO, or Weighted
Average for inventory valuation, providing clarity on accounting
practices.
2 Breakdown of Costs
Reports must separate direct (materials used in production) and
indirect (supporting materials like lubricants) material costs, enhancing
cost visibility.
3 Abnormal Losses
Any unexpected material loss must be recorded separately in financial
statements, ensuring accountability and transparency.
Impact on Financial Statements:
Accurate Product Pricing
Better Cost Control and Efficiency
Compliance with Standards and Regulations
Proper material cost allocation ensures
Treatment of Scrap and
Wastage:
Normal Abnormal Scrap
Loss Loss Valuation
Expected wastage Unexpected Scrap can be sold,
during production wastage beyond reused, or
is included in normal limits is disposed of, and
material cost, recorded as an its value is
accounted for as expense, recorded properly
part of standard highlighting areas in accounts,
operating for improvement optimizing
procedures. and control. resource recovery.
Conclusion: Key Takeaways of CAS 6
CAS 6 ensures uniformity and transparency in material cost accounting, helping businesses optimize resource utilization,
improve cost management, and comply with regulatory requirements.
