Top 5 Functions of ‘Cost Audit’ Aids Management

This article throws light upon the top five functions of ‘Cost Audit’ Aids Management. The functions are: 1. As an Aid to Decision-Making 2. As an Aid to Management Information System 3. As an Aid to Determination and Co-Ordination of the Company’s Activities 4. As an Aid to other Kinds of Services 5. As an Aid to the Productivity Audit.

Functions of ‘Cost Audit’ Aids Management:


As an Aid to Decision-Making

As an Aid to Management Information System

As an Aid to Determination and Co-Ordination of the Company’s Activities

As an Aid to other Kinds of Services

As an Aid to the Productivity Audit

‘Cost Audit’ Aids Management: Function # 1.

As an Aid to Decision-Making:

Though decision-making has been defined as choosing from among alternative courses of action, actually it involves identification and diagnosis of the problem as a fundamental step before proceeding on to the other steps, such as developing alternatives, their analysis and evaluation, and selection of the best or most suitable alternative.

Often past acts and omissions, predetermined objectives, and environmental consideration set the stage for present decision-making.

The Statutory Cost Audit:

(a) Through its audited cost statements, reveals not only the cost information but also the operational statistics for each of the system (e.g. production function, services function, etc.) and sub-system (e.g. production-process cost centre, utility centre- power, water etc.) for the current year and deviations thereof from the previous year and/or standards; and

(b) Through its report, highlights the variations in production and input consumption and suggests areas for improvements in performances (e.g. production imbalances, key limiting factors causing production bottle-necks, etc.); and thereby identifies the problem areas for diagnostic studies by the management for the purposes of arriving at decisions.

It should, of course, be borne in mind that the cost audit is of no aid to management when different alternatives are to be evaluated in terms of intangible factors, like risks involved, employee morale, public relations, industrial relations and so on.

‘Cost Audit’ Aids Management: Function # 2.

As an Aid to Management Information System:

The following information in ‘cost’ terms and/or in the form of ‘ratios’— Financial position (Capital employed, Net worth, Profit before tax, Ratios of operating profit to capital employed/net sales, Net worth to capital employed/long term borrowing and liabilities, production cost to capital employed/working capital);

a. Production (capacity addition, capacity planning and capacity utilisation);

b. Raw materials (consumption per unit of output and variance analysis with reference to standards or previous years) ;

c. Stores, power and fuel (consumption per unit of production and variance analysis with reference to standards/previous years) ;

d. Wages and Salaries (classified into direct labour costs on production, indirect employee costs on production, administration, selling and distribution, total man-days of direct labour used against availability, variance analysis as compared to previous years, impact of incentive schemes on production, productivity and cost effectiveness) ;

e. Total amounts of overheads of various types and variance analyses thereof as compared to previous years;

f. Average sales realisation—aggregate and per unit; and

g. Cost auditor’s observations and conclusions (as an independent outsider) particu­larly on funds management, production facilities utilisation, cost reduction areas, productivity improvement areas, identification of key limiting factors causing production hold-ups, etc., based on the verified data aids the various levels of operational management in designing of plans and strategies for the future.

‘Cost Audit’ Aids Management: Function # 3.

As an Aid to Determination and Co-Ordination of the Company’s Activities:

The ‘audited’ cost statements for various cost centres relating to production, utilities and services research and development aid the management to determine the cost effectiveness of the activities performed both from the aspects of quality and quantity. These statements reveal to them the degree of cohesiveness and co-ordination existing in the functional managements’ activities.

‘Cost Audit’ Aids Management: Function # 4.

As an Aid to other Kinds of Services:

The management of any company, in the context of various economic legislations, requires from time to time the ‘certificates’ from a cost accountant on certain specific areas of activities—For example, Drugs (Prices Control) Order, Import Trade Control, Central Excises, Export Drawbacks, etc.

The audited cost accounting records and cost statements provide a basis for authentication of those certificates, and simplify the work of the concerned Govt. departments.

‘Cost Audit’ Aids Management: Function # 5.

As an Aid to the Productivity Audit:

Any conscious management is serious about the performance and productivity of their company.

The audited statistical data, such as available machine hours, actual machine hours utilised with reasons for stoppages under classified headings, material yield with information on waste/scrap/salvaging operations, production per machine hour/labour hour, etc., and a host of information so generated assist the management directly towards productivity measurement and introducing productivity audit even by themselves.

Here, the internal (cost) auditor of a company can judiciously analyse the information and present his valuable audit suggestions to the various levels of management for productivity and efficiency improvement.

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