Cost Accounting Standard (CAS) 22: Manufacturing Cost

Cost Accounting Standard (CAS) 22: Manufacturing Cost – Principles, Allocation, and Disclosure

Introduction to CAS 22

Cost Accounting Standard (CAS) 22 lays down the principles for determining, allocating, and reporting manufacturing costs. It ensures that companies apply a systematic approach to cost classification, allocation, and reporting.

Accurate manufacturing cost allocation helps in:

• Correct inventory valuation
• Cost control and reduction
• Pricing strategies and decision-making
• Regulatory compliance and financial transparency

In this article, we will explore:

• Scope and applicability of CAS 22
• Classification and allocation of manufacturing costs
• Methods for cost determination and distribution
• Disclosure and compliance requirements
• Common errors and best practices
• FAQs for better understanding

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Scope and Applicability of CAS 22

CAS 22 applies to all manufacturing organizations, including:

• Automobile manufacturers
• Pharmaceutical companies
• Textile and garment manufacturers
• Electronics and machinery producers

It does not apply to service-based industries, as it strictly deals with tangible product manufacturing costs.

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Key Definitions in CAS 22

1. Manufacturing Cost

The total cost incurred in producing goods, including:

• Direct material costs
• Direct labor costs
• Factory overheads (indirect costs)

2. Direct Costs

Costs that can be directly traced to a specific product or production process.

Example: The cost of raw materials used in making a car or the wages of workers assembling it.

3. Indirect Costs

Costs that are essential for production but cannot be traced to a single product.

Example: Factory rent, depreciation on machinery, and electricity bills.

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Classification of Manufacturing Costs Under CAS 22

1. Direct Material Cost

This includes the cost of raw materials directly used in production.

Example: Steel in automobile manufacturing, fabric in garment production.

2. Direct Labor Cost

The wages and salaries of workers directly involved in production.

Example: Machine operators, assembly line workers.

3. Factory Overheads (Indirect Costs)

These costs support manufacturing but cannot be traced to specific products.

• Depreciation of factory machinery
• Electricity used in production
• Maintenance of production equipment

4. Administrative and Selling Costs

These costs are not part of manufacturing costs but should be reported separately.

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Principles of Cost Allocation Under CAS 22

1. Direct Cost Allocation

Direct costs are charged directly to products.

Formula:
Total Direct Cost = Direct Material Cost + Direct Labor Cost

Example:
A furniture company spends ₹8,00,000 on wood and ₹3,00,000 on labor to produce 2,000 tables.

• Total direct cost = ₹8,00,000 + ₹3,00,000 = ₹11,00,000
• Direct cost per table = ₹11,00,000 ÷ 2,000 = ₹550 per table

2. Indirect Cost Allocation

Indirect costs are allocated using a logical basis such as machine hours, labor hours, or production volume.

Formula:
Allocated Indirect Cost = (Product-Specific Allocation Base ÷ Total Allocation Base) × Total Indirect Costs

Example:
A factory spends ₹15,00,000 on factory overheads for multiple products. If a product accounts for 2,000 machine hours out of 10,000 total machine hours, the allocated indirect cost is:

(2,000 ÷ 10,000) × ₹15,00,000 = ₹3,00,000

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Methods for Manufacturing Cost Allocation

1. Absorption Costing

• All costs (direct + indirect) are absorbed into product cost.
• Used for external financial reporting.

2. Marginal Costing

• Only variable costs are assigned to products; fixed costs are treated as period costs.
• Used for decision-making and break-even analysis.

3. Activity-Based Costing (ABC)

• Costs are assigned based on actual activities rather than a blanket rate.
• Suitable for complex manufacturing environments.

Example:
Instead of allocating factory rent equally, costs are assigned based on the number of hours each machine operates.

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Compliance and Disclosure Requirements Under CAS 22

1. Disclosure of Manufacturing Costs

Companies must disclose:

• Total manufacturing costs incurred
• Methods used for cost allocation
• Breakdown of direct and indirect costs

2. Explanation of Cost Allocation Methods

Organizations must clearly disclose how indirect costs were allocated.

3. Impact on Financial Statements

CAS 22 ensures accurate cost reporting, which impacts:

• Profit calculations
• Inventory valuation
• Pricing strategies

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Real-Life Example of Manufacturing Cost Allocation

A textile company produces 50,000 shirts with the following costs:

• Direct material cost = ₹25,00,000
• Direct labor cost = ₹10,00,000
• Factory overheads (indirect costs) = ₹15,00,000

Manufacturing Cost Per Shirt Calculation

• Direct cost per shirt = (₹25,00,000 + ₹10,00,000) ÷ 50,000 = ₹70
• Indirect cost per shirt = ₹15,00,000 ÷ 50,000 = ₹30
• Total manufacturing cost per shirt = ₹70 + ₹30 = ₹100

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Common Mistakes and How to Avoid Them

1. Incorrect Cost Classification

Mistake: Treating advertising expenses as manufacturing costs.
Solution: Separate administrative and selling costs from production costs.

2. Improper Allocation of Indirect Costs

Mistake: Allocating factory overhead equally to all products.
Solution: Use machine hours or activity-based costing for precise allocation.

3. Insufficient Cost Disclosure

Mistake: Not explaining how indirect costs are allocated.
Solution: Provide transparent cost allocation disclosures.

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Frequently Asked Questions (FAQs) on CAS 22

Q1: What costs are included in manufacturing costs?

Direct materials, direct labor, and factory overheads.

Q2: How should indirect costs be allocated?

Using machine hours, labor hours, or production volume.

Q3: What disclosures are required under CAS 22?

Manufacturing costs, cost allocation methods, and cost classifications.

Q4: Can selling and distribution costs be part of manufacturing costs?

No, these costs are separate from manufacturing costs.

Q5: How does CAS 22 impact pricing?

Accurate cost allocation helps in setting competitive and profitable prices.

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Conclusion: Key Takeaways from CAS 22

• CAS 22 standardizes manufacturing cost allocation.
• It ensures accurate financial reporting and cost control.
• Businesses must clearly disclose cost allocation methods.
• Proper cost classification improves pricing and profitability.

By following CAS 22, manufacturers can optimize costs and improve decision-making.