COST AUDIT
Cost Audit comprise ;
(i) Verification of Cost Account records, and
(ii) Examination of these records to ensure that they adhere to Cost Accounting principles, plans, procedures and objectives.
Types of Cost Audit
(1) On behalf of management :
(i) Establishing accuracy of cost data
(ii) Whether objectives of Cost Account being achieved.
(iii) Abnormal losses and gains with causes.
(iv) Determine unit cost of production
(v) Proper overhead rates.
(vi) Fixation of contract price.
(vii) Improving quality of Cost Accounting System.
(2) On Behalf of a Customer : For Cost plus contracts
(3) On Behalf of Government : For subsidies etc., may be to determine fair price.
(4) By Trade Association : Maintenance of a price.
(5) Statutory Cost Audit : U/s. 233 B of the Companies Act
Under-noted circumstances may also warrant the introduction of Cost Audit :
(i) Price fixation, (ii) Cost variation within the industry, (iii) Inefficient management
(iv) Tax assessment (v) Trade dispute.
Advantage of Cost Audit
To Management To Society To Shareholder To Government
1. reliable data
2. check on wastage
3. inefficiency & corrective action
4. MBE
5. Budgetary control & Standard Costing
6. Valuation of closing stock
7. detection of error and fraud 1. Fixation of Price
2. Justification of price increase by increase in cost of production
Proper records are kept for material, wages, etc. 1. Cost plus contract
2. Ceiling price
3. Inefficient unit.
4. Protection to certain industries
5. Settlement of Trade dispute.
6. Healthy competition among units in industry.
General features of Cost Records
(ii) Materials → Raw material, processed material, consumable stores, etc.
→ Purchased, issued and balance.
→ Cost to include all direct charges upto works.
→ Separate records for wastage, spoilage losses, etc.
→ Method to adjust the loss.
→ Method of valuation actual or standard costing.
(iii) Manufactured components & Intermediaries :
→ Separate records
→ Quantity and value
→ Wastage
(iv) Stores and Spare Parts :
→ Receipt, issues and balances.
→ Quantity and value.
→ All direct charges upto works
→ Used should be charged to relevant head.
→ Wastage separately shown.
(v) Wages and Salaries :
→ Proper Records to show attendance and earnings.
→ Records to show overtime wages, piece rate wage earned, incentive wages and
earnings of casual labourer.
→ Idle time.
→ Extent of wages and salaries capialised.
(vi) Overheads :
→ Proper maintenance of records.
→ Classified under works, Administration and selling and distribution overheads.
→ Allocation of or. to deptt., etc.
→ If allocation on method other than actuals the variation and its treatment.
(vii) Service deptt. Expenses including Expenses on utilities :
→ Expenses on power, fuel, water and steam (purchased or generated)
→ Expenses on subsidized canteen.
→ Maintenance deptt. Expenses.
→ Allocation on reasonable basis.
(viii) Depreciation :
→ Cost, date of installation, rate of depreciation, and amount of depreciation provided.
→ Old assets.
→ Minimum rate of depreciation in Company Act.
→ AS-6.
(ix) Packing : → Quantity and cost of packing material.
→ Wages and other expenses on packing.
→ Income received by sale/disposal of spoiled, rejected waste materials.
(x) By-products :
→ Proper records.
→ Receipt, issues and Balances (quantity and value).
→ Basic of Valuation.
→ Sales realization.
→ Expenses on further process of by-product.
(xi) Production and Sales :
→ Records (quantity and value)
→ Separate records of packed and unpacked finished goods.
→ Records of Sales and inventory.
(xii) Inventories : → Classified as raw materials, stores and spare parts WIP and finished goods.
→ Separate records (quantity and value).
→ Physically verified.
→ Reasons for shortage and excess.
→ Method to determine cost of WIP and finished goods.
→ Methods to be followed consistently.
(xiii) Variances : → If Standard Costing i.e. other than actuals then procedure followed to work out cost of the products.
→ Reasons for variances.
(xiv) Cost Statements :
→ As part of cost records.
→ w.r.t. each product.
→ Form of cost sheet (prescribed).
(xv) Reconciliation of Cost and Financial Account :
→ To ensure accuracy.
→ Variations clearly indicated an explained.
→ Period of reconciliation < financial year of company.
→ Difference between sales realization and total cost and then it is reconciled with financial P&L A/c. for the period.
→ Specific information in Both A/c. not to be different.
(xvi) Royalty : → Records of Royalty paid.
→ With terms of agreement.
→ Basis of computation.
→ Allocation to different cost centers, etc.
→ If it is a direct charge or overhead.
(xvii) Statistical Records :
→ Plant utilization, idle machine time, capital employed, capital W.I.P.
→ Percentage of different raw materials.
→ To have control over various operations and costs.
(xviii) Inter – Company transfer :
→ Normally, no inter co. transfer below cost.
→ Ensure against shifting of profits between corporate investors.
→ Proper valuation of inter-company transfer to generate revenue (duty and tax).
Programme of Cost Audit
(c) Review of Cost Accounting Records : This will include :
i) Method of costing in use – batch, process or unit.
ii) Method of accounting for raw materials; stores and spares, wastages, spoilage defectives, etc.
iii) System of recording wages, salaries, overtime and spares, wastages, etc.
iv) Basis of allocation of overheads to cost centers and of absorption by products and apportionment of service department’s expenses.
v) Treatment of interest, recording of royalties, research and development expenses, etc.
vi) Method of accounting of depreciation.
vii) Method of stock-taking and its valuation including inventory policies.
viii) System of budgetary control.
ix) System of internal auditing.
(d) Verification of cost statements and other data. This will include the verification of :
i) Licensed, installed and utilized capacities.
ii) Financial ratios.
iii) Production data.
iv) Cost of raw material consumed, wages and salaries, stores, power and fuel, overheads provision for depreciation etc.
v) Sales realization.
vi) Abnormal non-recurring and special costs.
vii) Cost statements.
viii) Reconciliation with financial books.
Exemption from Cost Audit
The exemption from Cost Audit on year-to-year basis in the following situation :
(i) Temporary Closure of the company/products.
(ii) Negligible production activity.
Fees :
Company having an authorized Capital Amount of fees to be paid
A Less than Rs.25 lakh Rs. 500
B Rs.25 lakh or more but less than Rs.5 crore Rs.1,000
C Rs.5 crore or more Rs.2,000
Appropriate documents are required to be furnished along with application for exemption :
(i) True copy of complete Annual Report containing balance sheet and profit and loss account for the year for which exemption is being sought along with copies of the same pertaining to preceding two years.
(ii) An affidavit containing full facts of capacity utilization turnover and financial status of the company, duly signed by two Directors of the company and authenticated by a Notary Public.
(iii) A brief note/status report on steps taken by the management for revival of the said unit.
Steps in Cost Audit
Review → verification of cost data → Refer to financial statement → Reporting.
Cost Audit Report
Within 180 days of end of F.Y. to Central Government. A copy to company whether –
(iii) All information
(iv) Proper Cost Account records as required.
(v) Proper returns from Branches.
(vi) Books give information in manner so required.
(vii) Cost statement as specified in annexure are kept by company.
(viii) In his opinion, true and fair view of cost.
Auditor’s observation and suggestions ;
(i) Adequacy or otherwise of Cost Accounting System and suggestions for improvement thereof.
(ii) Adequacy or otherwise of Budgetary control system, if any.
(iii) Matters clearly wrong in principle.
(iv) If price charged for related party transactions is different from normal price and its impact.
(v) Areas of decline profitability or loss with reasons, including default on payment to Government, F.I. and Banks, etc.
(vi) Steps required under competitive environment.
(vii) Export commitments vis-à-vis actual exports.
(viii) Scope of internal audit of records and its adequacy, etc.
True and fair cost of production :
(iv) Accepted Cost Accounting principles.
(v) Costing system appropriate to product.
(vi) Materiality.
(vii) Consistency.
(viii) Prescribed form.
(ix) Elimination of prior period adjustments.
(x) Abnormal losses ignored in determination of cost.
Composite Audit
It is not feasible due to :
(i) Different information system (accounting data / costing data).
(ii) Objective of Audit. (True and Fair financial statement Vs. Cost).
(iii) Classification of accounting data (A/c head vs. Cost centres).
(iv) Confidentiality. (Cost Audit Report is more confidential).
(v) Applicability (for all Co. vs. Some Industries).
(vi) Tool of Management (overall results vs. weaknesses in cost the system)
(vii) Extensive Nature: (cost auditor also on propriety & efficient aspects).
Annexure to Cost Audit Report
(1) General.
(2) Cost Accounting System
(3) Process of manufacture.
(4) Quantitative Details (*).
(5) (A) Major Input Materials / Components Consumed (*).
(B) Standard / Actual consumption of input material per unit.
(6) Break-up of cost of input materials imported during the year (*).
(7) (A) Power, fuel and utilities (*).
(B) Standard / Actual consumption of power, fuel and utilities in terms of quantity per unit of production.
(8) Salaries and wages (*).
(9) Repairs and Maintenance.
(10) Fixed Assets Register and Depreciation.
(11) Gross Block, Depreciation and Lease Rent.
(12) Overheads (**)
(13) Research and Development Expenses (**)
(14) Royalty and technical know how charges (**)
(15) Quality Control Expenses (**).
(16) Pollution Control Expenses (**).
(17) Abnormal non-recurring costs (**)
(18) (A) Non-moving stock at end of the year (**)
(B) Written off stock during the year (**)
(19) (A) Inventory valuation at end of the year.
(B) Physical verification of stock.
(20) Sales of product under reference (quantity, rate amount for current and previous year).
(21) Margin per unit of output (*)
(22) Competitive margin against imports (**)
(23) Value Addition and Distribution of earnings (**).
(24) Financial position and Ratio Analysis (**).
(25) Capitalisation of Revenue Expenditure (**).
(26) Related party transactions.
(27) Central Excise Reconciliation for product under reference.
(28) Profit Reconciliation.
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