Query No. 2 Subject: Accounting for moulds and dies used in the manufacture of components.1 A. Facts of the Case 1. A company (hereinafter referred to as ‘the ancillary’) manufactures and supplies certain components to a manufacturer of motor cars (hereinafter referred to as ‘the principal manufacturer’).
2. The manufacture of these components entails the use of moulds/dies. Some of the moulds/dies are supplied by the principal manufacturer while others are arranged by the ancillary.
3. In respect of moulds/dies arranged by the ancillary, the two parties agree on what is termed as ‘tool cost’. The tool cost is agreed to be spread over a certain number of units of the component. For example, the parties may agree that the tool cost of, say, Rs.7,35,000 will be amortised over 1,50,000 units. The amortisation rate in this case works out to Rs. 4.90 per unit.
4. In some cases, a part of the agreed tool cost is paid by the principal manufacturer in lumpsum and the balance is amortised in the above manner.
5. While working out the cost of a component, the ancillary includes amortisation of the agreed tool cost as one of the elements of cost. In respect of moulds/dies supplied by the principal manufacturer, no tool cost is included in the cost of the components.
B. Query 6. The querist has sought the opinion of the Expert Advisory Committee as to whether the procedure followed by the ancillary in relation to costing of the components is proper.
C. Points Considered by the Committee 7. The 'Guidance Note on Terms Used in Financial Statements', issued by the Institute of Chartered Accountants of India, defines the expression 'cost' as "the amount of expenditure incurred on or attributable to a specified article, product or activity". Thus, from the view point of the ancillary manufacturer, the cost of the components manufactured by it is the expenditure incurred by it for manufacturing the components. 8. The Committee notes that one of the items of expenditure incurred by the ancillary manufacturer is moulds/dies. However, the useful life of moulds/dies is not restricted to an individual order; the moulds/dies are expected to last for a number of years or for producing a much larger number of units than the number of units comprising an individual order. In this regard, the Committee takes note of the following definition of the term 'depreciable assets' as given in Accounting Standard (AS) 6, Depreciation Accounting:
"Depreciable assets are assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business."
From the above, it would be seen that moulds/dies are in the nature of depreciable assets.
9. Paragraph 20 of AS 6 requires that "the depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset." The terms 'depreciable amount' and 'useful life' are defined in AS 6 as follows:
"Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost in the financial statements, less the estimated residual value."
"Useful life is either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise."
10. Based on the above, the Committee is of the view that the amount to be included in the cost of components in respect of moulds/dies is represented by the depreciation charge in respect of the relevant moulds/dies computed on the basis of their depreciable amount and useful life. The Committee recognises that the amount agreed to be paid by the principal manufacturer towards tool cost relating to moulds/dies may be different from the amount of depreciation computed in accordance with AS 6. D. Opinion 11. Based on the above, the Committee is of the opinion that from accounting
angle, the tool cost relating to moulds/dies to be included in the cost of
components manufactured by the ancillary manufacturer is represented by the
depreciation charge in respect of the relevant moulds/dies, computed in
accordance with the requirements of AS 6.
The Committee recognises that the amount agreed to be paid by the
principal manufacturer towards tool cost relating to moulds/dies may be
different from the amount of depreciation computed in accordance 1 Opinion finalised by the Committee on 22.4.2000. ________ |