COST AUDIT

Submitted By: Nisha

Roll. No.-1906
M.Com-II

Subject: Corp. Financial A/cing & Auditing

 Concept

As its clear from the name Cost Audit is the Audit of cost, i.e.
and costing methodologies followed by any production/
manufacturing organization.

It is the process of verification of cost accounts which includes

all the aspects that add to the cost of production/
manufacturing/assembling of certain kinds of goods.
Definition

According to I.C.W.A. ( Institute of cost and works

accountant of India):

“ Cost audit is an audit of efficiency of minute details

of expenditure while the work in progress, and not a
post mortem examination”.

“Cost Audit is mainly a preventive measure, a guide

for management policy and decision, in addition to
being the barometer of performance.”
Objectives of Cost Audit

1) To Detect Errors & Frauds

2) To verify the accuracy
3) To have a full control on working of costing Dept. of the Org.
4) To Reduce the detailed checking of the external auditor
5) Helps the mgt. to take correct and timely decision
6) Moral check on staff of cost accounting Dept.
7) To bring efficiency in cost a/cing systems & procedures
8) To bring efficiency in the use of material labour machines etc.
 Performing Cost Audit

1. COST OF RAW MATERIAL;

 The cost of raw materials, both in quantities and value, as given in

the statements, should be verified.

 In case the transport cost of raw materials is a significant element of

cost, as in the case of cement and sugar industry, the transport cost
is determined separately. In case of imported raw materials, the
various elements are: FOB value, ocean freight, insurance, custom
duty, clearing/forwarding and inland freight.

 Data for raw materials consumption have to be provided for the year
under audit, as well as for the previous two years, for comparison.
 2) Material Consumption

i. Material consumption is worked out by deducting closing

inventories, from the receipts and adding opening balance.

ii. Consumption of materials should be carefully checked

with the issues to production processes.

iii. Provisions of the cost accounting record rules should be

kept in mind, as the rules also specify accounting
requirements for raw materials and other direct and
indirect materials.
3) Wages And Salaries

The following particulars relating to wages and salaries be

included in Cost Auditor's Report,

i. Direct Labor Cost On Production;

ii. Indirect Employees Cost On Production;
iii. Employees Cost On Administration;
iv. Employees Cost On Selling And Distribution;
v. Bonus To Workers And Employees;
vi. Other Employees Cost, If Any (Including Taxes And Levies
vii. Total Employees Cost
After the ascertainment of cost is done it has to be then
compared with previous year figures.
4) Inventory Valuation

i. The various inventory cost formulas (LIFO, FIFO, HIFO),

weighted average cost, base stock, specific identification,
latest purchase price have different effect on costing and
asset valuation.

ii. If an entity follows a formula which is different from the

one generally followed by the industry, it should be
specially commented upon by the cost auditor in his
report.
5) Depreciation

i. Cost accounting record order/rules require that record of

all fixed assets, in respect of which depreciation is to be
provided, shall be maintained.

ii. Depreciation is charged according to the depreciation

policy of management, which may be on a straight line or
reducing balance method, based on the useful life of the
asset.

iii. Any basis adopted should be consistently followed. If any

basis, other than the useful life of the asset, is followed,
the impact of providing excess or less depreciation should
be pointed out.
(Vi) Allocation Of Overheads

The basis of allocation/apportionment of overhead cost to cost

centers should be in accordance with the

i. Accepted principles of cost accounting.

ii. Quantification of services rendered by service departments

to cost centers.

iii. On the basis of activities which are cost drivers.

Types of Cost Audit

1.Cost Audit under Statute.

To maintain proper records regarding materials
consumed, labour and other expenses under section 209 that
are required to get their cost accounts audited.
-To ascertain the relationship of costs and prices.
2. Cost Audit to Assist Management
-To make accurate, relevant and prompt
information to mgmt to assist in imp managerial
decision.

3.Cost Audit on behalf of Govt.

-To ascertain correct cost of certain units.
-To ascertain correct cost of contract given to
private firms under ‘cost plus’ basis.
4. Cost Audit on behalf of Customer
-Cost audit may be conducted on behalf of the
customer when he agrees to pay price for a certain product on
‘cost plus’ basis.

5. Cost Audit on behalf of Trade Association.

-To ascertain comparative profitability of its
members.
-To determine min price to avoid cut throat
competition among its members.
Advantages of Cost Audit

The important advantages of cost audit can be studied as

under:

1) To the Management

2) To the Shareholders

3) To the Consumers

4) To the Government

5) To the Society
1)To the Management

i. Control On Different Elements Of Cost

ii. Assessment Of Profitability
iii. Check On The Role Of Uneconomic Units
iv. It Helps In Reducing The Prices
v. Check On Cost Control Techniques
vi. Helpful In Budgetary Control & Standard Costing
vii. Fixing Responsibilities Of Specific Persons
viii. Proper Valuation Of Raw Material & Work- In- Progress
ix. Helpful In Fixation Of Contract Price ( Tender Price)
2) To the Shareholders

i. Guarantee Of The Proper Maintenance Of Records

ii. Fair Return On Investment

iii. Timely & Proper Information

3) To the Consumers

i. It Helps In The Fixation Of Fair Prices

ii. Increase In The Standard Of Living

4) To the Government

i. Improve working of uneconomic industrial units

ii. Guidance

iii. Helpful in providing cost statements & other relevant

information

iv. It facilitates the settlement of trade disputes

v. Helps the ‘Tariff Board’

vi. Ceiling prices

vii. Cost plus contract

5) To the Society

i. Provides guidelines to the industries for improving

working

ii. Justification of price increase by increase in cost of

production

iii. Reduces the prices

Criticism against cost audit

1) Unnecessary interference of government in the working

of the companies

2) It leads to duplication of work

3) Expensive & luxury

4) Harm to the interests of the company

5) Unrealistic regulations
Criticism (cont..)

6) Repeation

7) Shortage of cost accountants