The client is a central public sector enterprise (CPSE) incorporated to set up a natural gas-based ammonia urea complex along with offsite and utility facilities with a design capacity of 2,200 MTPD Ammonia Units and a 3,850 MTPD Urea Plant.
The company’s problem statement is two-fold:
To mitigate the risk of uninformed decisions due to the non-availability of robust costing data caused by inconsistent assumptions in the decision support system and lack of staffing.
To adopt a consistent costing strategy approach across all the subsidiaries and group companies.
The company wanted us to document the entire cost accounting process in the form of a manual including the whole value chain relating to cost accounting. This exercise will produce a comprehensive document that can support the costing decision support system.
A costing manual is not just an SOP (Standard Operating Procedure) document for the cost accounting processes but also a white paper on the controlling function of the organisation to support effective decision-making. The manual is a booklet containing detailed instructions to be followed by the Management Information System (MIS) and Cost Accounting department, along with other departmental teams, concerning cost accounting system maintenance, cost determination and its control. It lays down the recommended cost accounting plans, policies and related issues so the system can operate efficiently and effectively.
A typical uniform costing manual details - (a) objectives and the method of its administration and (b) the procedure to be followed for regular collection, analysis and reporting of cost data and their interpretation to the member units.
After the advent of IT ERP systems, cost management accounting is majorly shifting to ERP systems. Therefore, it is imperative to maintain congruency of the costing manual with the SAP-CO end user manual, and this is where the rubber meets the road.
Table of Contents of a typical Cost Accounting Manual:
- On the company’s vision, mission and objectives
Cost Accounting System
- What type of cost accounting system is being followed?
- Whether the cost accounting model is process costing, batch costing, job costing, contract costing, standard costing, etc.?
- Collecting, analysing and reporting cost accounting data in valuable frameworks.
- Designing data flow charts for understanding the flow of cost information from different operational and administrative information systems
Cost Accounting Policy
- Documenting the company’s basic costing policy structure.
- Identifying the relevant cost objects, cost drivers, cost centres, profit centres, etc.
- Drafting policy for the valuation of each major cost element involved in the cost statement like Raw Material cost, Employee cost, Depreciation, Overheads, etc.
- Valuing inventory in accordance with Ind AS 2 on “Inventories” issued by the Institute of Chartered Accountants of India. [Refer Footnote 1]
Product Cost Controlling (SAPCO-PC) and Product Portfolio
- Documenting the product specifications, the product hierarchies and their market.
- Documenting step-by-step methodology in calculating the cost of goods manufactured for a product.
- Defining the basic overview of the BOM (Bill of Material) structure and routing structure, along with the scrap yield loss percentage for identifying the material consumption per unit of finished goods (FG) produced.
- Defining the computation methodology for activity rates, like labour hours, machine hours, etc.
- Specifying the frequency at which a costing run is to be performed to update the cost of goods manufactured.
- Documenting the production processes lucidly taking the help of process flow charts.
- Also, documenting the auxiliary production processes like electricity generation, steam generation, etc., supporting the primary production process.
- Specifying the capacity determination methodology and quantifying the same. This should be computed machine-wise to identify bottleneck operations/ machines.
Cost Objects Identification (Cost Centre Accounting and Profit Centre Accounting (SAPCO-CCA and SAPCO-PCA)) and Codification
- Determining the cost centres across the value chain (i.e., machines, processes, departments, etc.)
- Defining the hierarchy for the cost centre controlling and reporting
- It encompasses production cost centres, utility cost centres, Administration cost centres, selling cost centres etc., thereby controlling the costs incurred inside an organisation. Cost Centre Accounting tracks department-wise expenses.
- Defining the profit centres hierarchy and the logic of profit centres identification. Generally, the profit centres are identified on a 2D (two-dimensional) matrix consisting of location and product segments.
- Allocating responsibility against the areas/ centres of profit.
- Establishing the relationship between cost centres and profit centres.
- Documenting a logical codification scheme for cost-centres/ profit centres comprising the company code, plant code, region, product group, functions, etc.
- Cost Elements are important objects that help to analyse or reconcile costs between the Financial Account (FI) and Managerial Accounting (CO) modules of an ERP.
- Defining the primary cost elements to be used in reporting like Raw Material Cost, Depreciation, Plant Administration, Utility cost, General Sales and Administration Cost, etc.
- Defining the secondary cost elements to be used in overheads calculation, internal cost allocation, distribution, settlements, etc.
Classification of Costs
- Classifying costs into variable, semi-variable and fixed categories. These are based on the behaviour of the costs in relation to variations in the volume of production of the end product.
- Non-operating income and non-cost expenditure should be defined herewith and excluded from the cost statements.
Overheads Cost Controlling (SAPCO-OM) and Allocation/ Apportionment of Costs
- Documenting the methodology to derive the final product costs and reporting varied other expenses like salaries, utilities, repair and maintenance, etc., that played a significant part in computing the same.
- Planning, allocating, controlling, and monitoring overhead costs.
- Tracking and examining the causes of costs in the functional areas of an enterprise, e.g., Freight Cost, Warehouse Cost, etc.
- Classifying relevant expenses (cost elements) based on their nature into appropriate overheads of the cost statements (e.g., Manufacturing, Administration, Selling and Distribution, etc.).
Accounting for primary cost elements
- Documenting the relevant accounting policy, notes and standards involving main cost elements, viz. material consumption, process chemicals, catalyst, salaries and wages, utilities, etc.
Bill of Material (BOM) and Conversion Ratio
-Studying Bill of Materials (BOMs) of the top 25 products and documenting the standards of the same in the manual.
- Defining conversion ratio from raw material (RM) to finished goods (FG). E.g., deriving material yields for producing end products etc.
- Studying process losses and yields over a regular time interval.
Monthly and Yearly Cost Statements
It includes the formats of cost statements and the frequency in which they are to be reported.
Annexures - Varied forms of reports and statements to comprehend and analyse the entire organisation’s performance
Annexure I – Department Coding system
Annexure II – Grouping of Expenses
Annexure III – Monthly/ Yearly Cost Statement Format
Annexure IV – Inputs from Technical Department
Annexure V – Inventory Valuation Format
Annexure VI – Statement of Calculation of Allocation Ratios
Annexure VII – Statement of Apportionment of Overhead
FREQUENTLY ASKED QUESTIONS:
What is cost accounting?
Cost accounting is the process of recording, analysing, and reporting the costs associated with producing a product or service. It involves identifying the different cost components of a product or service and assigning these costs to specific cost centres or activities within the organisation.
Why is it important to document the cost accounting story in an organisation?
Documenting the cost accounting story in an organisation is important for several reasons. It provides transparency and accountability in the accounting process, helps in compliance with regulatory requirements, and facilitates decision-making. Additionally, documenting the cost accounting story can help identify areas for improvement and optimisation of costs.
What is the cost accounting story?
The cost accounting story refers to the narrative or explanation behind the cost accounting process in an organisation. It includes the methodology used for assigning costs, the different cost centres or activities within the organisation, and the rationale behind cost allocation decisions.
What are some challenges associated with documenting the cost accounting story in an organisation?
Some challenges associated with documenting the cost accounting story in an organisation include the complexity of cost accounting processes, the need for accurate data and information, and the involvement of multiple stakeholders. Additionally, documentation may be time-consuming and require significant resources.
How can organisations document the cost accounting story effectively?
Organizations can document the cost accounting story effectively by adopting standardised accounting practices, utilising technology to streamline the process and improve accuracy, involving stakeholders in the documentation process, and regularly reviewing and updating the documentation to ensure relevance and accuracy.
What are some benefits of effective cost accounting documentation?
Some benefits of effective cost accounting documentation include improved transparency and accountability in the accounting process, compliance with regulatory requirements, better decision-making, identification of areas for cost optimisation, and enhanced stakeholder communication and understanding.
Reach us if you have any concerns regarding cost management accounting issues in your organization.
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: email@example.com
Tel: +91-8800018190, +91-7503703599.