Last updated: December 20th, 2017 5:44 AM

Determining Value of Supply Using Production Cost

Normally, goods or services are supplied in return for consideration. GST Act and Rules prescribe various methods for calculating value of supply when no consideration is transferred. If the value of supply cannot be determined by any of the other prescribed provisions, the value of supply must be taken as 110% of the cost of production, manufacture, or acquisition of such goods, or the cost of provision of such services. In this article, we look at determining value of supply using cost of production in detail.

Cost of Production for Captive Consumption

Institute of Cost Accountants of India has come up with a Cost Accounting Standard-4 (hereafter referred to as CAS-4), titled "Cost of Production for Captive Consumption". The standard deals with the determination of cost of production for captive consumption. Let us show you a glimpse of its calculation. Cost of production will include various cost components as defined in Cost Accounting Standard-1. As per CAS-1, the cost is classified as follows: Direct Material Cost+ Direct Labor Cost + Direct Expenses = Prime Cost Prime cost + Production Overheads + Administrative Overheads + R&D Cost(Apportioned) = Cost of Production Cost of Production + Selling Cost + Distribution Cost = Cost of Sales (Cost of Sales+Profit will be equal to Selling Price)

What constitutes Cost of Production?

Cost of production shall consist of the following:

• Material consumed
• Direct wages and salaries
• Direct expenses
• Works overheads
• Quality control cost
• Research and Development Costs incurred for development or improvement of the existing product
• Packing Cost
• Administrative overheads related to production
• Products transferred/dispatched, duly packed for captive consumption(Captive consumption means the consumption of goods manufactured in another division of the same organization, or anything related thereto)

To derive cost of production of goods dispatched/used for captive consumption; adjustments for stock of Work-in-process, finished goods, recoveries of sales of scrap, wastage etc. shall be made. Material cost shall be net of discounts, input tax credit, GST (if any), etc.

Cost Sheet Format

We like to present you with an illustration of a cost sheet format, for a better picture. This is the format suggested by CAS-4

Q1	Quantity Produced(Unit of Measure)
Q2	Quantity Dispatched(Unit of Measure)
	Particulars	Total Cost(Rs)	Cost/Unit(Rs)
1	Material consumed
2	Direct Wages and Salaries
3	Direct Expenses
4	Works Overheads
5	Quality Control Cost
6	Research and Development Cost
7	Administrative Overheads(Relating to production capacity)
8	Total(1-7)
9	Add-Opening stock of Work-in-Progress
10	Less-Closing stock of Work-in-Progress
11	Total(8+9+10)
12	Less-Credit for Recoveries/Scrap/By-Products/Misc Income
13	Packing Cost
14	Cost of Production(11-12+13)
15	Add-Inputs received free of cost
16	Add-Amortized cost of moulds, tools, dies and patterns etc. received free of cost
17	Cost of Production for goods produced for captive consumption(14+15+16)
18	Add- Opening stock of finished goods
19	Less-Closing Stock of finished goods
20	Cost of production of goods dispatched(17+18-19)

Valuation When Profits are Meager

In case of an organization making losses, and the cost of production or assessable value is higher in the above method, valuation on account of sale price to other buyers can be adopted for valuation.