This article throws light upon the top seven check points to be considered before doing cost audit. Some of the check points are: 1. Reconciliation of Cost and Financial Accounts 2. Pollution Control/Effluent Treatment 3. Utilities 4. Utilities other than the above (e.g., Refrigeration, Humidification, Air-Conditioning Compressed Air, Nitrogen, Brine, Oxygen, etc.) and a few others.
Check Points to be Considered before Cost Audit:
Reconciliation of Cost and Financial Accounts
- Pollution Control/Effluent Treatment
- Utilities other than the above (e.g., Refrigeration, Humidification, Air-Conditioning Compressed Air, Nitrogen, Brine, Oxygen, etc.)
- By-Products having Value Equivalent to 4% of the Materials Input Cost
- Catalyst Used in a Chemical Industry
- Jigs and Dies
Cost Audit: Check Point # 1. Reconciliation of Cost and Financial Accounts:
(a) The cost records should be reconciled with the financial books of account for the financial year so as to ensure accuracy between these two sets of record.
(b) The variations, if any, between these two records should be clearly indicated and explained with reasons.
(c) The reconciliation should be done in such manner that the profit of the ‘Product(s)’ under reference could be correctly arrived at and reconciled with the overall profit of the company.
(d) A statement showing the total expenditure incurred and total income received by the company under the different heads of account and the share applicable to the ‘Product(s)’ under reference should be maintained in the relevant proformae of Schedule II and reconciled with the financial accounts for the period.
Cost Audit: Check Point # 2. Pollution Control/Effluent Treatment:
Proper records should be maintained with respect to the expenses incurred on various measures to protect the environment such as effluent treatment, control of pollution of air, water, etc., and the same should be shown in the relevant Annexure to the Schedule I.
B. Cost Audit check-points are:
(a) Ascertain the nature and type of pollution incidental to the nature of industry.
(b) Ascertain the directives and/or specific orders of the State Pollution Control Board issued to the company and measures taken.
(c) Adequacy of the records showing the expenses incurred for each type of pollution.
(d) Examine the relevant Annexure details with reference to the basic records and related documentary evidences.
Cost Audit: Check Point # 3. Utilities:
Utilities used or consumed in a manufacturing company are of various types and vary according to nature and type of industry. Of all the utilities, Water, Steam and Power are mostly common in the industries and the use of other utilities such as Refrigeration, Air-conditioning, Compressed Air, Oxygen, Nitrogen, etc. depend on the manufacturing processes and facilities peculiar to the products or industries.
(a) Proper records showing the quantity and cost of treated/cooling/chilled/demineralized water produced and consumed for the manufacture of products in different cost centres or departments should be maintained in such details as may enable the company to furnish necessary particulars in the relevant Annexure to the Schedule I.
(b) The cost should be apportioned to the department’s concerned on a reasonable basis and applied consistently.
(c) The cost sheet as per Annexure should be prepared separately for each utility.
(d) If water is purchased, proper records showing the cost up to the works including all direct charges (e.g. water cess) should be maintained.
(a) Where steam is raised by the company proper records showing the quantity and cost of steam raised and consumed in the production of ‘product’ in different cost centres or departments should be maintained in such details as may enable the company to furnish the necessary particulars in the relevant Annexure of the Schedule I.
The cost of steam consumed by the product-related plants and other units of the company should be calculated on a reasonable basis and applied consistently. Where steam is raised and supplied by any other unit of the company to the product related plants, the cost of steam so supplied should be charged to those plants on a reasonable basis and applied consistently.
Proper records should be maintained for the quantity of Exothermic heat (i.e. waste heat) generated by other identical reaction plants and supplied to Boiler House and any other service plants and credit should be given to the ‘products’ on a reasonable basis and applied consistently.
(b) Wherever steam is produced and used by the process plants at different pressures, quantitative records for production and consumption of steam in different plants should be maintained at actual pressure but the same should be converted into an equated quantity in terms of one pressure (Low pressure/medium pressure/ high pressure) for the purpose of computation of steam cost and also its allocation to different user departments and the equated pressure should be suitably indicated in the cost statement (Annexure) for steam. The basis for valuation of steam at different pressures should also be indicated.
(c) In case steam is generated in waste heat boiler of the Captive Power Plant, proper records for value of heat so used should be maintained, so that its cost is debited to the steam cost and appropriate credit given to the cost of generated power. Where it is not possible to exactly quantify this heat, this should be done on reasonable technical estimates or other methods like heat per unit of steam consumed in Package Boiler, Main Boiler, etc.
(d) The basis and the rate of evaluation of waste heat should be indicated giving the details of cost centre from which transferred.
(e) Necessary credit for steam supplied to outside agencies should be given and shown in the Annexure.
(a) Proper records should be maintained for the quantity and cost of power purchased. If purchased power is used in a specific plant, its allocation should be disclosed.
(b) Where power is generated by the company itself, adequate records shall be maintained to show the cost of power generated and consumed for the production of ‘products’ in different cost-centres and departments and other details as may enable the company to furnish the necessary particulars in the relevant Annexure to the Schedule I. The realisation by sale of power to outside parties should also be shown in the Annexure.
(c) Where power is generated and supplied by any other unit of the company to the product-related plants adequate records should be maintained to indicate the quantity and cost of power so supplied, and the allocation of power cost to the production of ‘products’ should be on a reasonable and consistent basis.
Cost Audit: Check Point # 4. Utilities other than the above (e.g., Refrigeration, Humidification, Air-Conditioning Compressed Air, Nitrogen, Brine, Oxygen, etc.):
(a) Proper records should be maintained in respect of any or more of these utilities produced or purchased by the company so as to furnish the particulars in the respective Annexure to the Schedule I.
(b) In case of a utility being purchased, the records should show the delivered cost up to the works including all direct charges for both quantity and value.
(c) In ease of a utility being produced and supplied by the other unit of the company, adequate records should be maintained to assess the cost and the quantity of utility so supplied.
(d) The cost of utility, if any, supplied to any other unit(s) of the company, should be calculated on a reasonable basis and applied consistently.
(c) The cost of utility allocated/apportioned to the cost centres and further to the products should be on reasonable basis and applied consistently.
B. Cost Audit check-points:
The Annexures to the Schedule I relating to Water/Steam/Power/other Utilities/Effluent treatment call for a variety of information details e.g. installed capacity and its utilisation, units/quantities of production/generation/purchases/consumption, losses, element/head-wise conversion costs broken down into fixed and variable parts and so, the Cost Auditor should see and ensure that the records maintained by the company are adequate in all respects.
The cost auditor should exercise his checks especially on the following points:
(b) The details of purchases and sales of each utility.
(c) Consumption of materials like coal, fuel oil, electricity, stores, chemicals and catalysts, etc. with reference to the Requisition-cum-Issue vouchers.
(d) Computation of losses of any utility whether in transit, lending or otherwise in order to arrive at the net units/quantities available for consumption, and the details of consumption in the processing and service departments.
(e) Bases of valuation of each utility and those of allocation/apportionment to the cost centres and further to the products.
Further the cost auditor should keep in view the requirements according to the ‘notes’ appended below the Annexure so as to ensure compliance by the company.
Cost Audit: Check Point # 5. By-Products having Value Equivalent to 4% of the Materials Input Cost:
Records are not required to be maintained separately as the value of by-products is less than five percent of the cost of input of material. The rules relating to Chemical Industries and Insecticides (technical grade) provide for maintenance of record indicating the quantity and cost of chemical/by-products having significant value say 5 per cent or above of the cost of input of materials.
B. For Cost Audit:
For Cost Audit check, the value of by-products is most important and such ‘value’ is cost or market price whichever is lower. The computation of the value of by-product in relation to materials input cost needs to be scrutinized by the cost auditor.
Cost Audit: Check Point # 6. Catalyst Used in a Chemical Industry:
(a) Proper records should be maintained to show the receipts, issues and balances both in quantities and value of each item of catalyst and the same should be suitably adjusted for consumption for a financial year.
(b) If the life of the catalyst is more than one financial year, necessary adjustment should be made.
(c) If the life of the catalyst is not known, consumption should be assessed on a technical basis.
(d) The cost of such catalyst should include all direct charges up to works.
(e) The issues and consumption of catalysts should he properly identified with the, departments, cost-centers and products manufactured.
B. Cost Audit check should especially cover:
(a) Maintenance of records of stocks and issues.
(b) Aggregation of costs.
(c) Identification of products/cost centres where issued/consumed.
(d) Assessment of consumption on an yearly basis by an expert, as certain catalysts have regenerative features.
Cost Audit: Check Point # 7. Jigs and Dies:
(a) In respect of jigs and dies, the life of which is more than a year and value of which is more than Rs. 25,000 each, quantitative records showing the receipts and values at actuals in the case of bought out items including all expenses up to the works and at actual cost in the case of manufactured items should be maintained.
(b) The method of charging the cost of jigs and dies to the cost of production should be indicated in the cost records and applied consistently.
B. Cost Audit checks:
(a) Obtain a complete list of bought-out jigs and dies showing for each item the quantity, value, and useful life, duly segregated according to values worth up to Rs. 25,000 and above and verify the same with the stock cards and related documents, viz. purchase invoices, G.R. Notes etc.
(b) Ascertain the cost computations and ensure that all expenses up to the works are prorated over the bought-out jigs and dies.
(c) Obtain a list of own-manufactured jigs and dies and verify their computations of cost with reference to job orders and cost rates applicable and the lives estimated by the technical personnel.
(d) Ascertain the method applied for charging the cost of jigs and dies to the production cost and ensure as to its reasonability, uniformity and consistency from year to year.