A company engaged in manufacturing of super alloys generates a significant amount of scrap. It has been estimated that 95% of the generated scrap can be reused in the production process, while the remaining 5% is sold in the open market. The company recognizes the net increase or decrease in scrap stock as “Consumption of raw material-internally generated scrap” and is categorized under “Cost of Material Consumption.” Such classification of change in the inventory of scrap sometimes results in the understatement of raw material consumption. The company wants to affirm its classification and thus approached the EAC of ICAI for their input on the same.
The Expert Advisory Committee has noted that the cost of intermediates or components which are internally manufactured and transferred from one department to another within the same entity should be excluded from the cost of materials consumed. Thus, only purchased and not internally manufactured and transferred intermediates can be included in the ‘cost of materials consumed’.
On the basis of the above, the Expert Advisory Committee (EAC) is of the opinion that the company shall classify internally generated scrap, used in the subsequent production process as “Work-in-Progress” and should present it under ‘Changes in inventories of finished goods, work-in-progress and stock-in-trade’ under ‘Expenses’
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