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Author's profile photo Sivaprasad R

Mandatory Principle Based Cost accounting Records in India – GAP analysis with SAP

The Indian Government has prescribed mandatory cost accounting record rule for several class of companies which are engaged in Production , processing, mining activities. The definition of Production, processing, mining  is so wide that even several service companies also fall in the ambit of this order.  There is one view that Even IT companies fall under this notification. “ executing instructions in memory to perform some transformation and/or computation on the data in the computer’s memory”.  The notification is available at

As per the notification,

(1) Every company to which these rules apply, including all units and branches thereof shall, in respect of each of its financial year commencing on or after the 1st day of April, 2011, keep cost records.

(2) The cost records shall be kept on regular basis in such manner so as to make it possible to calculate per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly/quarterly/half-yearly/annual basis.

(3) The cost records shall be maintained in accordance with the generally accepted cost accounting principles and cost accounting standards issued by ICWAI ; to the extent these are found to be relevant and applicable. The variations, if any, shall be clearly indicated and explained.

(4) The cost records shall be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs with a view to achieve optimum economies in utilization of resources. These records shall also provide necessary data which is required to be furnished under these rules.

(5) All such cost records and cost statements, maintained under these rules shall be reconciled with the audited financial statements for the financial year specifically indicating expenses or incomes not considered in the cost records or statements so as to ensure accuracy and to reconcile the profit of all product groups with the overall profit of the company. The variations, if any, shall be clearly indicated and explained.

On studying the Notification, I cross checked whether SAP has the capability to meet the legal requirement or not ?

(1)   Yes.

(2)   Cost of production , Cost of sales , margin can be calculated using Product Costing and CO-PA functionality.

(3)    The generally accepted cost accounting principles as laid down by ICWAI are universal in nature, SAP has the flexibility to meet the same.

(4)   With its tight integration, studying the production data, sales data and with profitability analysis, cost accountant can suggest ways to improve efficiency.

(5)   Reconciliation between FICO profit for a fiscal year and Costing P&L Account ( i.e COPA) cannot be done in SAP directly. It can be done easily with Account based profitability analysis. Since most companies prefer to use Costing based profitability analysis due to its efficiency and flexibility, using Account based profitability analysis for Reconciliation and using Costing based PA for Product wise Margin analysis does not sound a good proposition.

  1. SAP presently does not provide any tools for automatic reconciliation
  2. It has to be done manually, by identifying various factors for the same.
  3. It adds credibility to the Margin analysis carried out by COPA

This is one of the most challenging tasks for any FICO consultants, since the value flow in CO is complex in nature through various channels i.e cost centers, Overhead orders, Production orders, Other CO objects to CO-PA.

SAP can consider this product development as a priority issue, so that, the reconciliation between Financial Accounting and Cost accounting books  happens automatically and online just similar to Reconciliation Leder

This not only helps Indian companies , but companies across the world will benefit out of this functionality as it improves the interlinkage between the  profitability reported via Financial Statement version and CO-PA

As this notification does not prescribe any particular Form of Maintenance of cost records and therefore principle based records maintenance system. SAP can consider to study the notification in depth and bring out series of SAP notes or Hotpacks , so that its contents can be implemented by SAP’s india clients. This will further strengthen SAP’s Leadership position in Indian ERP market.

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