Cost Accounting · Cost Accounting Standards (CAS 1 to CAS 24)

CAS 1 to CAS 6 Summary for CMA Intermediate

Updated 10 October 2026 · Fact-checked

CAS 1 to CAS 6 are the first six Cost Accounting Standards. They cover classification of cost (CAS 1), capacity (CAS 2), production overheads (CAS 3), captive consumption cost (CAS 4), average/equalised transportation cost (CAS 5) and material cost (CAS 6). To answer a question, name the standard, state its rule, then apply it to the figures.

Understand CAS 1 to CAS 6: Classification, Overheads and Materials

A Cost Accounting Standard (CAS) is a rule issued by the Cost Accounting Standards Board of ICMAI. It tells you how to measure, assign and present a cost, so that two companies treat the same item the same way. Exam questions test whether you apply the rule, not whether you recall the standard's wording.

CAS 1 (Classification of Cost) says every cost must be classified on a clear basis. Common bases include nature of expense (material, employee, direct expenses, overheads), relationship to the cost object (direct or indirect), function or activity (production, administration, selling and so on), behaviour (fixed, variable, semi-variable), normality (normal or abnormal) and controllability. This list is not exhaustive. A cost has to sit in a proper class before you can treat it correctly.

CAS 2 (Capacity) deals with determining capacity norms, that is, the levels of capacity used as the base for absorbing fixed cost. Normal capacity under CAS 2 is the average production or utilisation achieved or achievable over a period of years or seasons under normal circumstances, taking planned maintenance into account. CAS 3 (Production and Operation Overheads) is the main overheads standard in this range. Its logic is: collect overheads by cost centre, allocate what belongs to one centre, apportion shared items on a fair basis, then absorb into products. Fixed production overheads are absorbed on normal capacity. The cost of unused capacity is charged to the costing profit and loss account only where the idleness is abnormal. The cost of normal idle capacity stays in product cost.

CAS 4 (Cost of Production for Captive Consumption) deals with how you determine the cost of goods or services produced by an entity and consumed by itself. CAS 5 (Average (Equalized) Cost of Transportation) deals with the average or equalised cost of transporting goods. Neither is the general overheads standard, so use CAS 3 for overhead principles. Administrative overheads are covered by CAS 11, and selling and distribution overheads by CAS 17.

CAS 6 (Material Cost) says material cost is what it costs to bring the material to its present location and condition. That means purchase price, duties and taxes you cannot recover, freight inward, insurance, handling and other costs directly attributable to the purchase. You deduct trade discounts, rebates and taxes you can claim as credit. Abnormal losses and interest on late payment are not part of material cost.

Direct expenses versus overheads: a direct expense (CAS 10) is an expense other than material and employee cost that you can trace to a cost object in an economically feasible way, for example royalty on units made or hire of a special tool for one job. An overhead cannot be traced like that. It has to be allocated or apportioned, then absorbed. Employee cost (CAS 7) and direct expenses (CAS 10) have their own standards. They are covered on the related page on CAS 7 to CAS 12: Employee Cost, Utilities, Packing Material, Direct Expenses, Administrative Overheads, Repairs and Maintenance.

Key rules to remember

Material cost of purchase (CAS 6): Purchase price + non-recoverable duties and taxes + freight inward + insurance + handling + other directly attributable costs − trade discounts, rebates and recoverable taxes; Add only costs of bringing the material to its location and condition. Leave out interest, abnormal loss and recoverable GST.
Cost per usable unit with normal loss: Total material cost ÷ (Quantity purchased − Normal loss quantity); Normal loss is absorbed by the usable units, so the usable quantity (purchased less normal loss) is the divisor. Closing stock quantity plus abnormal loss quantity equals this usable quantity. Both are valued at this cost per usable unit, and the abnormal loss is charged to costing profit and loss.
Overhead absorption rate (CAS 3): Budgeted production overheads of the centre ÷ Normal capacity base (hours, units or other base); Use normal capacity for the fixed part. Under CAS 2, normal capacity is the average production or utilisation achieved or achievable over a period of years or seasons under normal circumstances, taking planned maintenance into account. Do not use a lower actual figure.
Under or over absorption: Overheads absorbed (rate × actual base) − Actual overheads incurred; A negative result is under-absorption. A positive result is over-absorption. For example, absorbed ₹4,80,000 less actual ₹5,90,000 = −₹1,10,000, which you report as under-absorption of ₹1,10,000. This total splits into the ₹1,20,000 cost of abnormal idle capacity, charged to costing profit and loss, and a ₹10,000 favourable spending variance. The favourable variance reduces the net charge to ₹1,10,000.
Cost of unused capacity: (Normal capacity − Actual capacity) × Fixed overhead rate, split into normal and abnormal parts; Only the abnormal part is excluded from product cost and charged to costing profit and loss. The normal part stays in product cost.
Direct versus indirect test: Traceable to the cost object in an economically feasible way = direct; otherwise = indirect (overhead); This is the CAS 1 test for relationship with the cost object.

How to solve CAS 1 to CAS 6: Classification, Overheads and Materials questions

Use this method for any question on CAS 1 to CAS 6, whether it is theory or a numerical.

1Read the question and name the standard it tests: classification (CAS 1), capacity (CAS 2), overheads (CAS 3), captive consumption (CAS 4), transportation cost (CAS 5) or material cost (CAS 6).
2For theory, state the principle in one or two lines, then give the treatment and a short example.
3For a numerical, list every item given and tag each one as include, exclude or treat separately. For example, mark recoverable GST as exclude and freight inward as include.
4Check for normal and abnormal items. Normal loss and normal idle time go into cost. Abnormal items go to costing profit and loss.
5Compute the cost or rate in a clear table, showing each line.
6Apply the result: value the stock, the abnormal loss, or the product's absorbed overheads, and show the under or over absorption.
7State the final treatment in one sentence, for example 'Idle capacity cost of ₹1,20,000 is charged to costing profit and loss'.

Quickest way: Include, exclude, abnormal sort

When to use it: Use it when a question gives many items and little time, mostly for CAS 6 and CAS 3 numericals.

Draw three columns: Include in cost, Exclude, Abnormal (to costing profit and loss).
Put each given item in a column in one pass. Recoverable taxes, discounts and interest go to Exclude or reduce the price.
Total the Include column and divide by usable units to get the rate.
Multiply the rate by abnormal quantity or abnormal idle hours for the costing profit and loss figure.
Check that Include total = stock value + abnormal loss value.

Common mistakes in CAS 1 to CAS 6: Classification, Overheads and Materials

Adding GST that is eligible for input credit to material cost.
Students add everything on the invoice.
Fix: Check whether credit is available. Recoverable tax is excluded. Only non-recoverable tax goes into cost.
Deducting normal loss quantity but then charging normal loss separately as a loss.
Students confuse normal with abnormal loss.
Fix: Spread normal loss over good units by dividing total cost by usable units. Only abnormal loss is a separate charge.
Absorbing fixed overheads on actual hours instead of normal capacity.
Actual hours feel more natural to use.
Fix: For the rate, use budgeted fixed overhead ÷ normal capacity. Use actual hours only to compute the amount absorbed.
Loading the cost of abnormal idle capacity onto products, or excluding the cost of normal idle capacity.
Students treat all under-absorption the same way.
Fix: Separate the unused capacity cost caused by abnormal reasons and charge only that to costing profit and loss. Normal idle capacity cost stays in product cost.
Treating direct expenses as overheads, or the reverse.
The two are both 'other expenses' besides material and labour.
Fix: Ask whether the cost can be traced to the job or unit in an economically feasible way. Yes means direct expense. No means overhead.
Using CAS 4 or CAS 5 as the overheads standard in a theory answer.
Students match numbers to topics loosely.
Fix: Quote CAS 3 for production and operation overheads. CAS 4 is Cost of Production for Captive Consumption and CAS 5 is Average (Equalized) Cost of Transportation, so use them only for those topics.

Worked examples

Example 1

Sundaram Foods Ltd. buys 1,000 kg of raw material at ₹120 per kg. Trade discount is 5% on the price. GST at 18% on the discounted price is fully eligible for input credit. Freight inward is ₹5,000, insurance in transit ₹1,500 and unloading charges ₹2,000. Interest of ₹1,000 was paid for late payment. Normal loss is 2% of quantity purchased. In fact 50 kg was lost, of which the excess over normal is abnormal. Find (a) total material cost, (b) cost per usable kg, and (c) value of closing stock and the abnormal loss, as per CAS 6.

Show the solution

Invoice value = 1,000 × ₹120 = ₹1,20,000.
Trade discount = 5% × ₹1,20,000 = ₹6,000. Net price = ₹1,14,000.
GST of ₹20,520 is eligible for credit, so exclude it. Interest ₹1,000 is excluded.
Total material cost = ₹1,14,000 + ₹5,000 + ₹1,500 + ₹2,000 = ₹1,22,500.
Normal loss = 2% × 1,000 = 20 kg. Usable quantity for rate = 1,000 − 20 = 980 kg.
Cost per usable kg = ₹1,22,500 ÷ 980 = ₹125.
Actual loss 50 kg, so abnormal loss = 50 − 20 = 30 kg. Good stock = 1,000 − 50 = 950 kg.
The 20 kg normal loss is absorbed by the 980 usable kg. So good stock 950 kg + abnormal loss 30 kg = 980 kg, not 1,000 kg. Both are valued at the cost per usable kg of ₹125. Stock value = 950 × ₹125 = ₹1,18,750. Abnormal loss = 30 × ₹125 = ₹3,750.
Check: 980 kg × ₹125 = ₹1,22,500, which equals ₹1,18,750 + ₹3,750. The whole material cost is therefore accounted for, with normal loss carried inside the ₹125 rate.

Answer: Material cost ₹1,22,500; cost per usable kg ₹125; closing stock (950 kg) ₹1,18,750; abnormal loss (30 kg) ₹3,750 charged to costing profit and loss. The 20 kg normal loss is absorbed by the 980 usable kg.

Example 2

Kaveri Engineering has a machine shop with normal capacity of 50,000 machine hours. Budgeted fixed production overheads are ₹6,00,000. In the year the shop worked 40,000 hours because of an abnormal power failure, so the whole 10,000-hour shortfall is treated as abnormal idle capacity. Actual fixed production overheads were ₹5,90,000. Compute the absorption rate, the overheads absorbed, the under-absorption and the amount to be charged to products and to costing profit and loss, as per CAS 3 principles.

Show the solution

Rate = ₹6,00,000 ÷ 50,000 hours = ₹12 per hour.
Absorbed = 40,000 × ₹12 = ₹4,80,000.
Absorbed less actual = ₹4,80,000 − ₹5,90,000 = −₹1,10,000. A negative result means total under-absorption of ₹1,10,000.
Unused capacity = 50,000 − 40,000 = 10,000 hours. All of it is abnormal, so cost of abnormal unused capacity = 10,000 × ₹12 = ₹1,20,000. It is not charged to products. It is charged to costing profit and loss. (Had part of the shortfall been normal, only the abnormal part would be excluded.)
Spending difference = ₹5,90,000 − ₹6,00,000 = ₹10,000 favourable. This is a spending variance, separate from the idle capacity cost.
Split of the total under-absorption: ₹1,20,000 idle capacity cost (to costing profit and loss) less ₹10,000 favourable spending variance = ₹1,10,000. The favourable variance reduces the net charge to ₹1,10,000.

Answer: Rate ₹12 per hour; absorbed ₹4,80,000; total under-absorption ₹1,10,000 (absorbed less actual = −₹1,10,000). Products carry only ₹4,80,000. This under-absorption splits into ₹1,20,000 cost of abnormal idle capacity, charged to costing profit and loss, and a ₹10,000 favourable spending variance, which reduces the net charge to ₹1,10,000.

Exam tips

In MCQs, watch for the trap items: recoverable GST, interest, abnormal loss and trade discount. Each changes the answer.
For theory questions on CAS 1, list the bases of classification in a clear sequence and give one example for each. This earns step marks quickly.
Show a neat cost statement for material cost, with each item on its own line and a total. Examiners award marks for the layout and for correct exclusions.
Write the final treatment sentence, such as 'charged to costing profit and loss'. Many students lose marks by stopping at the number.
Do not memorise standard numbers alone. Link each number to its title, so you can match a standard to the topic it tests.

Practice questions from Cost Accounting Standards (CAS 1 to CAS 24)

CAS 1 to CAS 6: Classification, Overheads and Materials in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalOverview of Cost Accounting Standards (CAS)

CAS 1 to CAS 6: Classification, Overheads and Materials: frequently asked questions

What does CAS 1 say about classification of cost?

CAS 1 requires costs to be classified on clear bases such as nature of expense, relationship with the cost object, function, behaviour, normality and controllability. The basis chosen decides how the cost is treated. In answers, name the basis and give an example.

What is the difference between direct expenses and overheads?

A direct expense (CAS 10) can be traced to a cost object in an economically feasible way, for example royalty per unit or hire of a special tool for a job. An overhead cannot be traced like that and must be allocated or apportioned, then absorbed.

Is GST part of material cost under CAS 6?

Only the part you cannot claim as credit is part of material cost. If input credit is available, the tax is excluded from the cost. Trade discounts and rebates are also deducted.

Which standard covers overheads in this group?

CAS 3 covers production and operation overheads. Administrative overheads are dealt with in CAS 11, and selling and distribution overheads in CAS 17. CAS 4 is Cost of Production for Captive Consumption and CAS 5 is Average (Equalized) Cost of Transportation, so neither is the general overheads standard.