Cost Audit Aspects: 2 Main Aspects of Cost Audit

This article throws light upon the two main aspects of cost audit. The aspects are: 1. From the Aspect of Statute 2. From the Aspect of Spheres for Action.

Cost Audit: Aspect # 1. From the Aspect of Statute:

In the case of a limited company, the scope of cost audit is outlined in the provisions contained in Section 233B of the Companies Act, 1956.


According to this section, “where in the opinion of the Central Government, it is necessary to do so in relation to any company required under Section 209(1)(d) to include in its books of account the particulars referred to therein, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a cost accountant within the meaning of the Cost and Works Accounts Act, 1959”.

According to Section 209(1) (d), “in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account”.

Presently, the scope of cost audit is limited to 43 industries only. It has its potentialities to widen its scope if the Central Government prescribes cost accounting records rules for more number of industries and issues more number of cost audit orders.

Cost Audit: Aspect # 2. From the Aspect of Spheres for Action:

The scope and coverage of cost audit extends to the verification and checking on the following important areas:

1. Services:

Utilisation of power, fuel, water, steam and electricity and that of material, labour and other costs like, overheads allocated to the service departments.


2. Wages and Salaries:

Maintenance of employment and attendance records of staff and workmen, overtime, idle time, allocation of salaries and wages among the production, services departments and department engaged for capital projects, including the wages sheets, etc.

3. Overhead:

Fair and equitable distribution basis followed for allocation, of over­heads, viz., manufacturing, administration, selling and distribution, reconciliation of financial records for overheads incurred with overheads absorbed as per cost records, overhead recovery rates and variances where standard costing system is followed, and the basis for classification of costs between fixed and variable.


4. Depreciation:

Maintenance of fixed assets registers with quantitative details and situation, method of depreciation charged and the allocation of depreciation in respect of common assets.

5. Production:

Daily production reports, summaries from daily to monthly, monthly to yearly and comparison with the past records and budgeted targets including abnormal losses, etc.


6. Work-in-Progress:

Maintenance of records viz., job card, works order, cost ledger, etc. and their valuation method.

7. Stock verification records, statistical records, etc.

8. Royalty/technical aid payments.

9. Capacity utilisation, including key limiting factors causing production bottlenecks.

10. Company’s policies and steps with regard to inventory management, cost control, cost reduction, productivity, internal audit, and budgetary control systems.

11. Exports performance and energy conservation.

12. Abnormal non-recurring costs affecting production due to abnormal features, e.g. strike, lockout, major breakdowns, etc. and their impact on production cost, and

13. Inter-company transactions.

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