This article throws light upon the top fourteen check points for cost auditor. Some of the check points are: 1. Modvat 2. Royalty/Technical Know-How Fee 3. Research and Development Expenses 4. Packing 5. Interest 6. Expenses/Incentive on Export 7. Overheads 8. Conversion Cost 9. Captive Consumption 10. Capital Works Carried out Departmentally 11. Credits for By-Products and a few others.
Cost Auditor: Check Point # 1. Modvat:
A. Modvat is an abbreviation of Modified Value Added Tax under the Central Excises and Salt Act, 1944. The scheme provides for instant credit of the input duty of central excise on the goods used in or in relation to the manufacture of the final product. The scheme consists of detailed procedure, documentation and records under the Central Excise Law.
The requirements of Cost Accounting Records Rules are:
(a) Where MODVAT or any other benefits are available on any item of material, the break-up details of such items should be furnished along with the proforma relating to the cost of sales of the Schedule II and also shown in the cost of production or cost sheet of cost of sales.
(b) MODVAT and other benefits, if any, (also benefits for exports) availed of by the company should be indicated separately (in the relevant proforma) showing their impact on per unit cost of product/sales.
B. The following points should be borne in mind by the Cost Auditor:
(a) Identification of materials on which MODVAT credit is allowed,
(b) System of accounting and adjustments (supported by duty-paying documents) to ensure that the final product is debited only with the purchase cost net of input duty of excise.
(c) Treatment of MODVAT adjustment in accounts should ensure true and fair cost of final product.
(d) The stock of raw materials is valued on the basis of cost of purchases less modvat credit, wherever applicable, in view of the Accounting Standard “on valuation of Inventories” issued by the Institute of Chartered Accountants of India.
Cost Auditor: Check Point # 2. Royalty/Technical Know-How Fee:
A. Royalties may be payable for:
(1) Minerals or ores from mines,
(2) Sales of products,
(3) Use of forests or bamboo fields, and
(4) Technical knowhow.
(a) Adequate records shall be maintained showing the royalty amounts or other recurring or non-recurring payments made to collaborators or technology suppliers in terms of the agreements entered.
(b) Adequate records shall be maintained showing product-wise royalties and their impact on the cost per unit produced/sold.
(c) The basis of charging the royalty amounts including one-time payments shall be disclosed in the cost records and as per Income Tax Act, such lump-sum payment should be capitalized over a period of 6 years.
(d) Royalty, being a direct charge, should be treated as under:
i. For technical know-how—Manufacturing Overhead.
ii. For mining operations—Cost of materials ‘
iii. For sales operations – Selling overhead
iv. For use of water from river – Water-utility.
B. Cost audit check-points are:
(a) The terms of agreements entered and the mode and manner of royalty payments.
(b) The use of resources and their quantities and rates.
(c) The royalty paid/payable as per foreign collaboration agreement and their verification with the details furnished to the Reserve Bank of India.
(d) Computation of the impact of royalties on costs of production/sales.
Cost Auditor: Check Point # 3. Research and Development Expenses:
(a) Expenses incurred in connection with the research and development shall be shown separately in the cost records.
(b) The method of charging these expenses to the cost of production as well as deferring the same in appropriate cases particularly where the utility of such work extends beyond one year is to be indicated.
(c) Expenses incurred on design and development of plant facilities shall be capitalized.
(d) Expenses incurred on furnishing technical know-how to outsiders shall be recorded separately and compared with the amount recovered from them.
B. Cost Audit check-points:
(a) Whether the cost records are separately made and maintained for:
(i) Existing products,
(ii) New products,
(iii) Manufacturing process improvement,
(iv) Plant & equipment design,
(v) Design of production/plant facilities, etc.
(b) Whether proper allocation of R & D expenses on general research or applied research is made and indicated as to the production/services cost centres.
(c) Whether there is reasonability, consistency and uniformity in the treatment of R & D costs to the products, including its categorisation as to revenue or deferred revenue expenditure.
(d) Whether adequate records are kept for R & D services to the outsiders and whether the revenues earned compare well with the relevant costs.
Cost Auditor: Check Point # 4. Packing:
(a) Proper records shall be maintained showing separately the receipts, issues and balances both in quantities and cost of various packing materials.
(b) The cost of packing materials, labour and other expenses incurred in packing products like cement, sugar, paper, cotton textiles, jute goods, bulk drugs, formulations, etc. is to be worked out as indicated in the Proformae given for each industry.
(c) The export packing is to exhibited separately under expenses applicable for export sales.
(d) Where packing expenses are incurred in common, the basis of apportionment of such expenses against different types and sizes of products shall be equitable and clearly indicated in the cost records and applied consistently.
1. Cotton textiles:
Material consumption may be apportioned on the basis of quantity requirement as per standard specification which is to be reconciled with actuals quarterly.
2. Bulk drugs:
Cost of packing in respect of different types and sizes of primary packing shall be made available separately. Where expenses are not capable of being charged directly to individual items, basis of apportionment shall be indicated.
B. Cost audit check-points:
(a) Whether clear distinction is made between primary packing and secondary packing.
(b) Whether the apportionment bases selected are applied uniformly and consistently.
Cost Auditor: Check Point # 5. Interest:
(a) Proper records shall be maintained showing interest charges.
(b) The amount of interest shall be allocated and apportioned to the product under reference and other activities on a reasonable and equitable basis which shall be followed consistently and the basis of such allocation/apportionment shall be clearly indicated in cost statements.
(c) In the product range within the industry the basis of further charging of the share of interest to various items of manufacture shall also be reasonable and equitable and the same shall be followed consistently.
(d) Insecticides (Technical Grade): Proper records shall be maintained showing interest- charges separately on term loan and cash credit/overdraft (working capital).
Cost Auditor: Check Point # 6. Expenses/Incentive on Export:
(a) Proper records showing the expenses incurred on the export of products shall be separately maintained so that the cost of export sales can be determined correctly.
(b) The expenses incurred on exports as well as any export incentives shall be reflected in the cost statement relating to export sales.
(c) Export incentives shall be treated as other income and reflected in the cost records.
(d) Expenses on export sales should be distinctly shown for making a proper comparison of cost and sales realisation of internal sales with export sales.
Cost Auditor: Check Point # 7. Overheads:
(a) The details of overhead expenses are to be collected from financial accounts, analysed into Factory, Administration and Selling and Distribution and allocated to various departments or units on a reasonable and consistent basis.
(b) Where the company manufactures products other than that under cost audit and also make capital additions, the common expenses including head office expenses shall be apportioned on an equitable basis over all the activities.
(c) Expenditure related to exports should also be segregated and charged against export sales.
(d) The methods adopted for allocating expenditure to the different manufacturing departments and absorption by the products shall have to be indicated clearly and followed consistently.
(e) The records of overheads should be kept in such a way as to enable the cost auditor to furnish information regarding factory overheads, administration overheads and selling and distribution overheads as required under item No. 11 of the Cost Audit (Report) Rules.
The additional points relating to overheads for the product-related rules are:
(1) Caustic Soda:
Where caustic soda is sold in different forms such as liquid or flakes, the common selling and distribution expenses are to be allocated and shown in each cost statement.
Administration overheads for manufacture of cement can be shown in one lump sum in the cost statement.
The selling and distribution expenses pertaining to complete cycles may be shown in one lump sum and those pertaining to components or sub-assemblies sold as spares are too shown separately in the respective cost records.
(4) Motor vehicles:
Selling and distribution overheads and after sales service applicable to completed motor vehicles shall be shown separately indicating the basis of allocation.
(5) Jute goods:
Factory and administration expenses shall be charged to the individual jute goods on the basis of machine hours, spindle hours, loom hours, piece wages, yardage, bales, etc. as may be suitable.
Where a vessel or plant is used for manufacture of more than one product, the cost thereof shall be charged on occupancy hours or some other equitable basis and applied consistently
(7) Bulk drugs:
Where different processes are carried out in multipurpose vessels for the manufacture of different drugs, the cost thereof shall be charged on equipment occupancy hours. Where predetermined rates are used, the variances from actual shall be adjusted at- the end of the year.
Cost Auditor: Check Point # 8. Conversion Cost:
(a) Proper records shall be maintained for splitting up of conversion cost (the cost of manufacture less direct materials cost) in fixed and variable costs for filling the reinvent annexure and proformae of schedules. This provision is applicable to Steel tubes. Electrical cables, Formulations, Insecticides (technical grade) etc.
(b) When more than one manufacturing process is carried out in a particular vessel or series of vessels, adequate records about the usage of such vessels for different products shall be kept. The cost of using such vessels shall be charged to the different products on an equitable basis e.g. equipment occupancy hours.
Where composite machine hour rates are applied for absorption of wages, overheads and equipment usage, proper records relating to the utilisation of labour and multipurpose vessels for different processes connected with the manufacture of different products shall be kept to enable determination of total machine hours and the amounts chargeable to the respective ‘products’ referred to in Rule 2.
The variances between the actual and the amounts charged at pre-determined rates shall be adjusted for arriving at the actual cost of production at the end of the year.
(c) The cost accounting records (Cotton Textiles) rules present a distinct contrast in structuring the cost accounts and the ascertainment of costs.
The rules provide:
(i) For accounting of cost classified into two categories – Material cost and Conversion cost.
(ii) For inclusion of a share of administration cost in conversion cost (which treatment appears to be a departure from the conventional concept of conversion cost),
(iii) For a ‘mix of direct and indirect cost’ to evolve as conversion cost (which is due to the different nature of processes and operations necessarily involved in this industry), and
(iv) For direct materials (excluding processing materials) not to be treated as conversion cost (in other words, processing materials should be treated as conversion cost component).
B. Cost Audit check points are:
(a) Mode and manner of splitting up of costs into fixed and variable elements;
(b) Basis of charging the costs particularly when the plants or vessels are common for different product;
(c) Manner of adjustments of cost variances between actual and amounts charged at predetermined rates for arriving at the production cost.
Cost Auditor: Check Point # 9. Captive Consumption:
(a) Proper records shall be maintained showing the quantity and cost of product transferred to other departments/units of the company for self consumption.
(b) Such transfer shall ordinarily be effected at the cost and shall be disclosed in the cost records.
(c) Where such products are transferred for captive consumption at a valuation other than cost, the notional profit or loss arising out of such transfer shall also be disclosed in cost records.
B. Cost Audit check-points are:
(a) Ascertainment of the products or units or departments of the company for which the ‘product (s)’ under reference are captivity consumed and verification with reference to the documents therefor.
(b) Ascertainment as to whether such transfers are made at costs or other than costs.
(c) For transfers at a rate other than cost, whether notional profit/loss considered and if so, whether the basis adopted is reasonable in consideration of the normally accepted accounting principles.
Cost Auditor: Check Point # 10. Capital Works Carried out Departmentally:
Materials consumed, wages and other expenses including appropriate share of overheads incurred in respect of works of capital nature carried out departmentally such as additions to plants and machinery and other assets shall be capitalized under relevant heads.
B. Cost Audit check points are:
(a) Ascertainment of the company’s policies regarding the classification of revenue expenditure and capital expenditure;
(b) Verification of capital budgets and capital expenditure projects of jobs;
(c) Verification as to how the expenses relating to material, labour and other indirect cost items are collected and allocated to the works of capital nature.
Cost Auditor: Check Point # 11. Credits for By-Products:
(a) Proper and regular stock records for each item of by-products showing the receipt, issues and balances, both in quantity and value shall be maintained.
(b) Actual sales realisation of the same shall be recorded.
(c) Where by-products are further processed before sale, the expenses incurred on such further processing and sales realisation after processing are to be recorded.
(d) The basis adopted for valuation of by-products for giving credit to the respective products/processes shall be equitable and consistent.
Product-related additional requirements are:
Credits have to be given for soap stock and glycerin derived. The actual quantity and cost of soap manufactured out of the same shall be indicated.
(2) Bulk drugs:
Any expenses incurred for the recovery of by-products like distillation and further processing shall be recorded to ascertain the ultimate cost of by-product in a saleable form.
B. Cost Audit check-points are:
(a) Ascertainment of the various by-products derived, the stages of arising, sales realisation (before/after further processing, if any) and
(b) Whether the valuation basis follows generally accepted costing principles.
Cost Auditor: Check Point # 12. Joint Products:
(a) Where more than one product having equal economic importance arises from the processes, the cost up to the point of separation of products should be apportioned to the joint products on reasonable and equitable basis and should be applied consistently.
(b) The basis of apportionment of joint costs to different products should be indicated in the cost records.
(c) These costs should be shown in the relevant proformae of Schedule II of the Rules.
B. The cost auditor should exercise the following checks:
(a) The nature and kind of joint products and their market standing, realisation through sales, etc. to judge economic importance.
(b) Whether the records are adequate to determine the costs up to the point of separation of joint products.
(c) The methods of cost apportionments and their equitability, consistency and disclosure in the Proforma of Schedule II (i.e. cost statements).
Cost Auditor: Check Point # 13. Cost Variance Analysis:
This arises when the cost records are maintained on any basis other than actual such as standard costing and involves analysis as to material, labour and overheads.
(a) The records should be adequate to indicate the procedure followed in working the cost of the product under the system.
(b) The method should allow for working out of the variance and clearly spell out their mode of adjustments in determining the actual cost of the product.
(c) The cost variances should be shown against the relevant heads in the respective Proformae of Schedule II and duly analysed into material, labour, and overheads and broken up into quantity, price, capacity utilisation, etc., and the adjustments should be made at least quarterly during the financial year.
(d) The cost records should indicate and explain the reasons for the variances
B. Cost audit check-points are:
(a) Ascertainment of the method—standard costing or otherwise.
(b) Records vis-a-vis adjustments with regard to element-wise and factor-wise cost variances together with the justifiable reasons therefor.
Cost Auditor: Check Point # 14. Capital Expenditure:
The requirements under the cost accounting records rules and the cost auditor’s checkpoints are same as discussed against serial number 20.