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.
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.
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 with AS 6
Opinion finalised by the Committee on 22.4.2000.