Company ‘X’ has one power plant and within the plant there are 4 sub-units which have equal capacity generation and the utilities like water plants, coal handling and supporting services are common for all sub units.
During the year, due to lack of demand from customers the 2 sub-units were idle for entire year and the balance two units were running at their normal captivity.
The company has sought opinion on how to compute the abnormal cost in the case of fixed expenses like:
1. Depreciation of particular sub-units which are not utilized, as they were idle.
2. Proportionate of O&M Expenses (Monthly Fixed charges paying for 4 units to Contractor irrespective of
capacity utilization as per agreement).
3. Proportionate of Factory overheads.
Whether the company can proportionate administrative overheads of Head office and Interest and Financial cost since company have only one production plant and no other business and these are the major fixed expenses incurred during the year.”
On the basis of the above, the opinion in respect of the issues raised by the company:
(a) Abnormal Idle Capacity is the difference between Normal Capacity and Actual Capacity Utilization where the Actual Capacity is lower than the Normal Capacity as defined in CAS-2
(b) In this case, two sub-units of the power plant are idle due to lack of demand for the entire year and two units are running at normal capacity. They are determining the abnormal idle cost.
(c) Administration Overheads of the Head Office, are not related to production. Hence are to be absorbed during the year of incurrence as period costs.
(d) Interest and finance expenses are not treated as item of production/ generation cost in the cost statement. Therefore, those costs should be charged as period cost in the cost statements, as these do not form part of the underutilization of the capacity.
On the basis of the above, Administration Overhead will not form part of Abnormal Cost due to underutilisation of Capacity.
The above opinion was affirmed by the ICMAI-Expert Advisory Committee.
