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Cost Audit

Cost Audit is a critical review undertaken to verify the correctness of Cost Accounts and to check that cost accounting principles and planning have been efficiently followed. It is noteworthy that India is the only country which has introduced statutory cost audit to regulate about 45 vital industries of the country.

 Applicability

It is applicable to every company including foreign company defined in Section 2(42) of Companies Act, 2016, engaged in the production of the goods or providing services, having an overall turnover from all its products and services of 35 crore or more during the immediately preceding financial year, shall be required to maintain cost accouning records. However, foreign companies having only liaison office in India and engaged in production, import and supply or trading of medical devices are exempted. Further, companies which are classified as a micro enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) are also excluded from the purview of the Rules.

Cost Audit comprises following;

  • Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data and costing technique and
  • Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objective.
Objectives of Cost Audit:
Prospective Objective1. Under which cost audit aims to identify the undue wastage or losses and ensure that costing system determines the correct and realistic cost of production.
Constructive Objective1. Cost audit provides useful information to the management regarding regulating production economical method of operation reducing cost of operation and reformulating Cost accounting plans

Types of Cost Audit:

Efficiency Audit

Efficiency Audit is directed towards the measurement of whether corporate plans have been effectively executed. It is concerned with the utilization of resources in economic and most remunerative manner to achieve the objectives of the concern. For example, the effective utilization of capital in an organization can be gauged by determining return on capital employed.

Propriety Audit

Propriety Audit is concerned with executive actions and plans bearing on the finance and expenditure of the company. The auditor has to judge whether the planned expenditure is designed to give optimum results.

Statutory Audit

This type of audit is conducted in accordance with the provisions ofSection 148 ofthe Companies Act 2013. It is the compulsory audit which required to maintain the related books and accounts ofspecifiedestablishments. Thechiefaimsofthistypesofauditisthatthegovernmentwantstoascertainthe relationship of costs and prices.

1. Cost Audit as an Aid to Management:

  • The aim is to see that all information placed before management is relevant, reliable and prompt so that management can discharge its duties well. It must also be seen that no relevant or pertinent information is suppressed.

2. Cost Audit on Behalf of a Customer:

  • Often contracts are placed on “Cost Plus” basis. In other words, the customer will determine the final price to be paid on the basis of exact cost plus an agreed margin of profit. The customer, in such a case, usually gets cost accounts of the product concerned audited to establish correct cost and, therefore, price.

3. Cost Audit on Behalf of Government:

  • Sometimes the Government is approached with request for financial help or protection. Before taking a decision on the request, the Government may choose to get cost accounts of the applicant audited to establish whether the need for help is genuine or is a result of mere inefficiency.

Cost Audit on Behalf of the Trade Association:

  • Sometimes trade associations seek to maintain prices at a certain level. For this purpose, the accuracy of costing information submitted by various concerns has to be checked. The trade associations may seek to have full information about production capacity and the relative efficiency of productive processes.

Cost Audit under Statute:

  • As per Section 148 of Companies Act, 2013, whereby the Central Government may order that certain classes of companies will get their cost accounts audited by a member of the Institute of Cost and Works Accounts of India. Only such companies as are required to maintain proper records regarding materials consumed, labour and other expenses under Section 128of Companies Act, 2013 and may be required to get their cost accounts audited.
  • The powers and duties and manner of appointment of the cost auditor are the same as that of external financial auditor and the same disqualifications will apply. The cost auditor will submit his report to the Company Law Board with a copy to the company. The right to investigate all aspects of cost accounts is presumably granted to the cost auditor.
  • The aim of cost audit under statute seems to be that the Government wishes to know, as an instrument of control, the costs of various goods. Government has the power to prescribe the forms in which cost audit reports are to be made out. These are designed not only to verify information, but also to convey good deal of information to Government.

Procedures of Cost Audit:

  • Review
  • Verification
  • Reporting

Advantages of Cost Audit to Different Sectors:

To Management:

  • Errors in following costing principles and techniques are detected. Inconsistencies and frauds can also be detected. This keeps everyone alert and promotes efficiency.
  • Cost audit can serve to measure performance of managers and better performance can be rewarded.
  • It helps to prepare accurate cost reports and this business planning can be more accurate.
  • Inter-firm comparisons can be made with ease and this might be a very useful proposition if industrial intelligence is good.
  • Cost audit can give an idea about the comparative operational efficiency of each department of division; and may thus pin-point deficiencies and also encourage to operate in a competitive spirit.

To Cost Accountant:

  • His task is facilitated since errors, deficiencies, etc., are pointed out. Costing plans can be prepared to take care of these things.
  • Cost audit may help in easier reconciliation of cost and financial accounts.
  • If the cost auditor is an outsider and is an expert, he can certainly give some practical and sound advice to streamline costing systems and organisation.
  • Cost audit helps to focus attention of management on the problems faced by the cost accountant. This helps him to realize his goals and objectives with ease.

To Statutory Auditor:

  • Audited cost data helps him to determine the value of stocks, remuneration of managerial personnel, etc., with ease and accuracy.
  • Data and statements of cost audit help him to prepare his audit programme and plan so that he concentrates more on those aspects which have not been adequately covered by cost audit.

To Consumers:

  • The direct benefit accrues where a statutory cost audit has been done to fix a reasonable price for the consumers.
  • Since cost audit aims at ensuring efficiency in the organisation, this may also get reflected in reduced prices to the consumers.

To Labour:

  • If cost audit is done thoroughly labour also stands to gain through increased profitability in the shape of bonus and other benefits.
  • Also it brings into focus the role of labour in improving efficiency in term of increased productivity.

To Shareholders:

  • There is correct valuation of all kinds of inventories. This may project a true picture of the organisation before shareholders and other investors and help them to assess its performance.
  • External cost audit highlights efficiency or inefficiency, utilisation of manpower and other resources, adequacy of return, etc.

To Government and Economy:

  • It helps the government to settle accounts where cost-plus contracts have been made.
  • The government can intervene to protect the interests of the consumers, labour, shareholders and investors from exploit-age or inefficient managements.
  • At the national level, cost audit promotes cost consciousness and overall efficiency. This means that every rupee invested produces the maximum quantity of goods and services.

Cost Accounting Records

The areas of activity in respect of which cost accounting records are to be maintained under Cost Accounting Record Rules are:

  • Raw Materials, Components, Stores and Spare Parts
  • Salaries and Wages
  • Service Department Expenses
  • Utilities
  • Depreciation
  • Other Overheads
  • Conversion Cost
  • Research and Development Expenses
  • Interest
  • Joint Products and By-products
  • Work in Progress and Finished Goods Stock
  • Cost Statements
  • Records of Physical Verification
  • Packing
  • Production Records

Cost Auditors are required to express an opinion in a prescribed format. For the format, kindly follow the below link:

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