This article throws light upon the top ten check points for auditing cost accounting records. Some of the check points are: 1. Direct Materials, Including Process Materials 2. Finished and Semi-Finished Components 3. Consumable Stores Tools and Spares 4. Wastages, Spoilages, Defectives, Rejection, etc. 5. Salaries and Wages 6. Depreciation 7. Work-in-Progress and Finished Goods Stock and a few others.
Check Points for Auditing Cost Accounting Records:
- Direct Materials, Including Process Materials
- Finished and Semi-Finished Components
- Consumable Stores Tools and Spares
- Wastages, Spoilages, Defectives, Rejection, etc.
- Salaries and Wages
- Work-in-Progress and Finished Goods Stock
- Stock Verification
- Production Records
- Statistical Statements/Records
Check Point # 1. Direct Materials, Including Process Materials:
A. Requirements as per Cost Accounting Records Rules:
(a) Keeping in view the nature of industry, records showing the receipts, issues and balances both in quantity and value in, respect of all items of Direct material (viz. Raw materials), including the Process materials should be maintained. That means, a ‘Priced Ledger’ showing the above details are required to be kept, so also the Bin cards (without value) or Stock cards.
(b) The valuation should be made taking into account all expenses up to works. A summary distribution, on ad-hoc or other basis, of freight, insurance, etc., at the year end is not permissible. The expenses have to be linked up with receipts.
(c) The element of transport cost of Raw material should be separately identified.
(d) A consistent procedure for the valuation of the issues of these materials for consumption is also prescribed. So for costing purposes, net consumption has to be arrived at after adjustment of unused stocks lying at the production site.
(e) Wastage, spoilages, rejections, losses, etc., whether in transit, storage, manufacture or for other reason should be shown separately. The method followed for adjustments and the income derived from the disposal of rejected and waste materials in determining the cost should be indicated.
B. The Cost Auditor should keep in mind the following:
(a) Ensure 100% checking of the Raw materials and the Process materials as they constitute a major part of the total cost;
(b) Collect all documents connected with the receipts, issues, and stock-taking reports, check-up the entries in the Priced Ledgers and examine evaluations or receipts with reference to the relevant bills and Goods (Materials) Receipt Notes;
(c) Examine reconciliation of Materials Ledger at Cost Accounts Department with the Bin cards at the Godown;
(d) Ensure that the freight and other incidental expenses are added to each category of the materials;
(e) Ensure that Materials Receipt Notes have pre-printed serial Nos. and that all are accounted for;
(f) Ensure that the materials received at year-end have been taken either as Receipts or at least as Materials in transit;
(g) Examine the procedure for issue of materials, system of authorisation and movement;
(h) Check-up the posting of issues in the Ledger and Bin cards;
(i) Ensure that the Ledger contains the correct figure of opening balance in quantity and value as per the previous year’s physical inventory. Similarly, he should check up the postings of closing physical inventory. Should examine and check-up the procedure for treatment of excesses or shortages;
(j) Ensure that the issues are valued consistently, and check-up the procedures for analysing the issues department-wise and cost-centre-wise, and,
(k) Ensure that the balances in the individual Priced Ledger tally with the control accounts in the General Ledger.
In addition to the above, the Cost Auditor should keep in his mind about his own requirements, in connection with the Cost Audit Report (Annexure), to:
(a) Show the cost of major Raw materials consumed both in terms of quantity and value, and to specify the related transport cost separately, if significant;
(b) show the consumption of major Raw materials per unit of production compared with the standard requirements, and to give explanations for variations as compared to the preceding two years, and
(c) Comment on the method of accounting followed.
Check Point # 2. Finished and Semi-Finished Components:
A similar procedure of Priced Ledger discussed against item No. 1 is envisaged in respect of Bought-out components (finished or semi-finished) and Own manufactured components (applicable to engineering industries).
For Own-Manufactured Components:
The records should be adequate to:
(a) Show the cost arrived at through a system of Job-orders or Work-orders for individual items or batches. A quantitative reconciliation with the issues for various purposes is also expected under the rules. A consistent valuation procedure is also desirable.
(b) Show the quantities and values of individual components or group of components forming a sub-assembly on the lines similar to those followed in the case of raw materials and purchased components.
(c) Show the quantities manufactured, accepted, and rejected for individual components or each batch of components or sub-assemblies, and indicate the method of dealing with losses on account of rejection in the calculation of costs by way of foot-notes’ or explanatory notes.
(d) Show either the actual or standard cost of materials, labour and overheads expenses.
(e) Exhibit the reconciliation of the quantities produced, including adjustment for opening and closing stock of major aggregates or components, with those required for the production or assembly and transfer to spare parts, and
(f) Ensure physical control and verification.
For bought-out components:
(a) The elements of freight, insurance, etc.., should be separately identifiable for each type or category, should the rules for a specific industry provide as such.
(b) The basis on which the values of the purchases and issues have been calculated should be indicated and/or a separate manual of procedure should be maintained, and such basis should be applied consistently.
(c) The records should be adequate to assess wastages, spoilages and rejections, etc. The method of dealing with such rejections, etc., and that of accounting of their realised values should be indicated in the Cost Records.
(d) If the value of the materials/components consumed is determined on any basis other than actual, the method adopted for such valuation as well as the method of reconciling such consumption with actual and the method of treatment of variations should be disclosed in the Cost Records.
B. The Cost Auditor should:
(a) Exercise 100% checking in respect of all components—Bought-out or Own manufactured;
(b) Keep in mind the following special points:
(i) Whether the company is buying most of the components from outside and assembling them,
(ii) Whether the company is buying semi-finished components and/or finish the same or get them finished from outside, and
(iii) Whether the company is making its own components;
(c) Collect the list of components—own made, bought-out, finished or semi-finished.
(d) In case of own-made components, examine the system of accounting for quantities manufactured in the shops and transferred to the components-stores or kept in the shops,
(e) Examine the movement documents from the shops to stores, from the stores to the assembly line/shops, from the stores or assembly shop to godowns (for sale as spare parts or for supply as free replacement),
(f) Examine the quantitative reconciliation between the components made and those issued for various purposes,
(g) Examine the Job order system, issue of materials to the machine shops (i.e. Bill of materials) and the system of Job-costing method with due consideration as to the following fundamental aspects:
(i) Computation of machine hour rates or departmental or shop rates for charging labour and overheads to the various jobs, and
(ii) Periodical review and reconciliation system of labour and overhead expenses actually charged to the jobs with those actually incurred, ensure whether there is a proper control record showing the essential particulars, viz. party-wise quantity of materials/parts issued, quantity actually received back, time lag, etc. in respect of jobbing work done by the outside agencies, and check-up the outstanding, and follow-up measures on the part of the management, check up the procedures for receipt of the components after the job work is done- by the outsiders, and examine whether jobbing costs and material costs are properly included,
(j) Check-up the Control record for the quantities of receipts and issues for outside job- work with reference to the basic documents, e.g. Despatch advice, Goods Receipt Notes, etc.,
(k) Examine the quantitative reconciliation done for own-made components as well as link up the entries made in the Priced Ledger for receipts and issues on the same pattern for Raw materials,
(l) Check-up the Priced Ledger maintained for fully bought-out components with reference to the basic documents like—Receipt Notes, and Issue Notes for issues to the assembly lines,
(m) Examine the procedures adopted by the company for defective components returned to the suppliers, mode of free replacements and the steps taken for accounting. Should check up and ensure that the replacements are not counted as fresh supplies, and that the values are not included for the returns as well as for the replacements in the Ledger,
(n) For Semi-finished components bought out from outside and the finishing work done at the factory, examine the system adopted, and check up whether similar procedure outlined at (g) above is followed.
(o) Examine- whether the Priced Ledgers contain the correct figures of opening and closing physical inventories, and check up the procedures for accounting treatments for shortages, excesses and damages of bulky items due to long storage, if any, and-
(p) Ensure that the balances shown in the individual Priced Ledger tally with those in the control accounts in the General Ledger.
Check Point # 3. Consumable Stores Tools and Spares:
A similar procedure of Priced Stores Ledger is envisaged for Consumable stores, Tools and Spares also, as has been outlined at Serial No. 1 above. For engineering industries, the Rules generally provide that adequate quantitative records should be maintained showing all receipts, issues and balances of various items required for the manufacture of the product.
If the value for each individual item is not maintained, only quantitative records may be maintained for the physical movement of each item, as the company decides. The values can be had from the group Control Account. The Rules also prescribe that the consumption of these items should be allocated to the different departments of production and services on a suitable basis.
The Bin Cards or Stock Cards (without values) are also to be maintained. Thus, it is possible to group the Priced Ledgers for small items and major items separately. Detailed Priced Ledger should be maintained for all major items of Consumable stores. As regards the valuation the Record Rules prescribe for its adoption consistently.
B. The Cost Auditor should keep in mind that:
(a) The quantitative records for receipts, issues and balances should be maintained by the company in respect of each item of Stores, Tools and Spares and for each specification. The Bin Card can, therefore, constitute the record for the purpose.
(b) The accounting for values in respect of issues and balances may be limited to major items of considerable value—which may constitute 70% to 80% of the total stores and for minor items a consolidated group Control Account may serve the purpose,
(c) He may adopt a system of ‘test-checking’ regarding the entries in the quantitative records for smaller items,
(d) The classification and codification by grouping of similar items would assist him in. carrying out his routine checks in this area, and
(e) In engineering units, the company may buy small tools and at the same time may fabricate their own tools.
He should, therefore:
(a) Check-up the Priced Stores Ledger for major items as to their receipts, issues and balances, consisting of both quantity and value.
(b) Link up the entries in these Ledgers with reference to the basic documents like Stores Receipt Notes, Stores Requisition, Stores Issue Note, Stores Transfer Note, Stores Return Note, etc. The extent of his checking need not be extended to 100% as this part is a task of great magnitude. He may utilise the technique of statistical sampling in this audit area,
(c) Ensure that a Priced Ledger for Consumable tools purchased is maintained on a line similar to the Raw materials at (1) above,
(d) Study and check-up the practices of issuing of tools,
(e) Examine as to whether the tools issued to the shop floor are again received back into the ‘Tool Store’, in case the company follows a practice that the consumption will be limited to the depreciation on the tools,
(f) Examine as to whether the tools issued are considered as consumed, and check up the reasonableness of the system and in either case, ensure that this procedure is followed uniformly and consistently,
(g) Examine as regards tools made and fabricated at the works, whether a proper costing-system is followed before the completed tools are sent to the Tool Store, and check up the cost procedures adopted,
(h) Ensure that the tools which are capitalized are not shown as expenditure in the form of consumption, labour charges, etc.
(i) Examine the Stores Consumption Analysis Statement for a chosen period to ensure that the Issue Requisition. Notes are identified with the well-defined cost-centres production as well as services and capital job-work, and that the valuations are done on a consistent basis, and
(j) Check-up that the annual consumption, as disclosed by the periodical analysis statements (cost-centre-wise) reconcile with the consumptions as derived, and arrived at in financial accounting, i.e. (opening stock + purchases) – closing stock = consumption, after taking into account the excesses and shortages in the physical stock-taking, and ensure that the valuation difference is within the tolerable range.
In addition to the above, the Cost Auditor should keep in his mind about his own requirements to report, on—
(a) The expenditure per unit of output on stores, etc.
(b) The proportion of closing inventory of stores representing the items which have not moved for over 24 months.
Check Point # 4. Wastages, Spoilages, Defectives, Rejection, etc.:
The Cost Accounting Record Rules provide that:
(i) Adequate records should be maintained to ascertain and assess wastages, spoilages, defectives rejections and losses of materials during transit, storage, including the line spoilages in the manufacture of the product in order to enable the company to exercise effective control on the consumption and usage factors of the materials.
(ii) The cost records should indicate:
(a) The reasons and the method of dealing with such wastages, spoilages, etc., in the calculation of costs,
(b) The quantity of scrap recycled and reprocessing charges, and
(c) The method of accounting of the realised value of such spoilages, wastages, rejection, etc., and that of valuing rejected materials reused in process, and the manner of adjustments of these recoveries in the cost of production. The method of cost computation should be followed consistently,
(iii) Where the company operates a Standard Costing System, the standard or norm of consumption of materials should take into consideration the factors of wastage, spoilage, scrap, etc. Such wastages, etc., should also be classified into normal and abnormal categories according to their nature and extent.
The cost of normal wastages should be charged to the production orders or recovered from the suppliers where such wastages or defects are due to bought-out components and materials. The cost of abnormal wastages should not be charged to the cost of production. The account to which such costs have been originally debited should be credited with the realised value of the wastages, etc.
B. The Cost Auditor:
The Cost Auditor should, before auditing these items, obtain from the company the ‘Production Process Flow Chart’ showing the input of materials, process materials stocks at the beginning and at the end, output of materials at different stages of operation, etc., and should ascertain the criteria applied by the company to distinguish and differentiate the various categories of wastages, defectives, spoilages, etc.
He should, therefore, keep in mind:
(a) The nature and type of industry,
(b) The nature and extent of wastages, etc., generally found with such industry, and
(c) Their accounting treatment followed in general.
The Cost Auditor should:
(i) Study the different processes or operations where such spoilages or defectives occur, and check up the system followed by the management for collection of such spoilages;
(ii) Verify whether the terms of supplies of materials, components and parts, etc., by the outside supplies provide for replacement of defectives or adjustments otherwise;
(iii) Ascertain whether the ‘Bill of Materials’ (in Jobbing and Engineering industries) provides for wastage allowance and their extent, and accordingly, examine whether
Such limits of allowance are uniformly and consistently applied for and technically reviewed from time to time by the management;
(iv) examine not only the records contemplated by the rules but also other documents or operating reports, e.g. Job Order Report on Defective Work, Statement of Materials Standards vis-a-vis Scrap Arising’s, Bin cards for Scrap at the yard, etc., as may be made out by the company;
(v) Examine reconciliation of a record showing the quantity of an intermediary product issued and the quantity of the components produced taking into account the number of rejects due to workmen’s faults, line damages and faulty materials, in the case of shop-fabricated parts or components.
Here, the Cost Auditor should ensure that the cost of the rejects, except where the cost is claimed from the suppliers of intermediary products, is absorbed in the cost of the finally accepted output;
(vi) keep in mind that, in the case of heavy engineering industries involving assemblies and sub-assemblies and machining operations, the rejections occur in the course of manufacture of semi-finished items due to the suppliers’ defectives, and such defects can be detected only after some machining and/or other process has been carried out, and therefore, the loss is not only on account of the material costs but also the labour spent in the processes up to the stage of rejection.
While the material loss is generally recoverable from the suppliers, the cost on labour spent is a loss to the company. In these cases, the Cost Auditor should check up and ensure that such losses are analysed by the management and added to the cost of the good quantities produced;
(vii) Understand that the value of scrap, defectives and rejects etc., particularly in heavy engineering industries, is quite significant, and accordingly, should make sure that adequate and effective control measures are in existence, and that the physical standards of the materials are periodically examined by the company so as to ascertain the extent of scrap provided for the standards, where a Standard Costing System is in operation; and
(viii) Keep in mind that certain ferrous and non-ferrous-based industries (e.g. Aluminium, Steel pipes and tubes, Electrical cables and conductors, etc.) recycle scrap and rejected materials, for which he should examine the method for adjusting these recoveries in the cost of production.
Check Point # 5. Salaries and Wages:
A. Requirements as per Cost Accounting Records Rules are:
(a) Maintenance of Appropriate and Systematic Records to:
(i) Show the attendance of all employees, viz.—workmen and other operating – staff and the departments or cost centres and the work on which they are employed or engaged:
(ii) Indicate separately their earnings for each cost centre (Production, Utilities and Services)
Piece-rate wages earned;
Incentive wages earned either individually or collectively as production bonus or under any other scheme based on output;
Overtime wages earned; and
Earnings of casual labour engaged on casual work under classified headings.
In case of engineering industries (such as, Cycles, Room Air conditioners, Refrigerators,. Electric Lamps and Motors, etc.), the records should further show the cost of all wages and salaries allocated to different job-order/work-orders of shop-manufactured components, assemblies, sub-assemblies and machining operations including the finishing operations required for bought out semi-finished components.
(b) Maintenance of systematic idle time records duly classified according to the causes. The information should be maintained in such a way that the Cost-centre-wise analysis is possible. The Cost Records should disclose the method adopted for accounting of idle time payments in determining the cost of the products.
(c) Any Wage and Salaries allocable to capital works, such as additions or heavy repair works to plant and machinery, building or other fixed assets should be accounted for under the relevant capital heads.
(d) The Cost Accounting Records should disclose the fact of adjustments as to the variances, if the wages and salaries are charged to production on any basis other than actual and in the event, the reconciliation of such wages with actual should be made.
(e) In case of seasonal industries (e.g. Sugar), the records of attendance and earnings should show separate details of salaries and wages pertaining to the season and offseason periods.
(f) In case of Textile and Jute goods industries, the allocation of wages and salaries should be made to the various cost-centres and sub-centres on the basis of some key operating data, like machine hours, spindle shift hours, etc., and the piece-work wages absorbed on the basis of related output, such as bales, yardage, etc.
B. The Cost Auditor:
The Cost Auditor while auditing this item should keep in mind the following important matters, and should:
(a) Ensure checking of the following particulars for a period covering 2 to 3 months depending on the effectiveness of Internal Check System operating in the company:
(i) Method of recording of attendance, overtime, job or operation time, idle time, etc. for regular employees, daily-rated and casual employees.
(ii) Method of authentication and authorisation of overtime work, piece-work and of the rates as approved by the management.
(iii) System of internal controls and internal checks obtaining in the company to obviate the possibilities of collusion, dishonesty and other malpractices, on the part of people entrusted with the tasks of time-keeping, time-booking, quantum of piece-work output, etc.
(iv) Systems of payroll preparation, payroll analysis to various cost-centres and disbursement of wages.
(b) Examine the statement of reconciliation of total attendance in conjunction with leave and absenteeism records and the attendance paid for through the payroll department;
(c) Test checks the reconciliation of the total wages payable/paid and the department or cost centre-wise totals.
(d) Examine the reconciliation statement showing the total piece-work payments made and the total quantity of accepted piece-work output obtained in various operations, after having verified the authorised rates for piece-work.
(e) Check up the procedures adopted for inter-departmental movement of workmen and corresponding attendance booking for reasonable ascertainment of the cost of wages/salaries appropriate to the departments.
(f) Make sure that annual bonus to employees other than incentive bonus, provision for statutory gratuities are not clubbed with the salaries and wages.
(g) Ensure that the salaries of supervisory staff, who are not specifically identified to a particular department or cost centre, are not incorporated in this item, but considered as overhead.
(h) Verify the practice being followed in respect of:
(i) Perquisites, like house rent allowance, dearness allowance, Provident fund/ESI contribution, etc., as to their inclusion and cost centre-wise identification; that is, whether these are apportioned in the ratio of salaries and wages or otherwise.
(ii) Adjustment of variance in the cost records and the manner of reconciliation when wages and salaries are charged to production/services/utilities on any basis other than actual (i.e. Standard Costing System), and
(i) Examine the reconciliation made between the total salaries and wages as per Profit and Loss Account and that as per the Totals of cost-centre-wise Distribution Statement. This reconciliation, if not maintained by the company, should be insisted upon by the Cost Auditor as this would be of much assistance to him in filling up the Cost Audit Report.
In addition to the above, the Cost Auditor should keep in his mind about his own requirements to report,
(1) Total wages and salaries paid for all categories of employees separately in respect of:
(a) Direct labour costs and indirect employee costs on production,
(b) Employee cost on administration, selling and distribution,
(c) Other employee costs,
(2) Total direct labour man-days available and actually worked,
(3) Average number of workmen employed,
(4) Direct labour cost per unit of output of the product(s), and explanations for variations thereof as compared to the previous two years, and
(5) Comments on the incentive schemes as to their contributions towards increasing productivity and its effect on the cost of production.
Check Point # 6. Depreciation:
A. Requirements as per Cost Accounting Records Rules are :
(a) This item presupposes the maintenance of adequate and systematic records to show the cost and other relevant details of Fixed Assets in respect of which depreciation provision has to be made.
The records should contain:
(i) Cost of each item of assets including installation charges,
(ii) The date of its installation,
(iii) The rate of depreciation,
(iv) The location of each asset,
Subject to a flexibility clause that the valuation in respect of old assets for which the original cost of acquisition cannot be ascertained without unreasonable expenses or delay, the valuation shown in the books at the commencement of the financial year beginning on or after the commencement of the Cost Accounting Records Rules should be taken as the cost. Such valuation should not, of course, include revaluation done in the previous years.
(b) The Cost Records should:
(i) Indicate the basis, on which depreciation is calculated and allocated/apportioned to the various departments and cost centres and ultimately absorbed in the products,
(ii) Ensure that depreciation chargeable to the different departments/cost centres relates to the plant and machinery and other fixed assets utilised in those departments/cost centres,
(iii) Take care that depreciation amounts charged are not lower than the amounts chargeable under Section 205(2) of the Companies Act, 1956,
(iv) Show clearly and separately the amount of excess depreciation charges made in any financial year beyond the quantum chargeable under Section 205(2) of the Companies Act, and its impact on the cost per unit.
(c) The cumulative figures of depreciation charged in the cost accounts against any depreciable asset should not exceed its original cost.
(d) The amount of depreciation which represents 100% write-off in a particular year contrary to the provisions in the Income Tax Act, 1961 and relevant rules should be spread over the number of years during which benefit is derived from such asset (applicable for Cotton Textile, Power driven pumps, Internal Combustion Engines, Diesel Engines, Electrical cables industries).
(e) The rates of depreciation adopted should be applied consistently from year to year. (This provision is applicable only for the products).
(f) The cost of lesser value items of plant and machinery should be allowed to be completely written-off in the year of acquisition up to the limit specified in the Income Tax Act, 1961 (such as Cement, Cycles, Tyres & Tubes, Caustic Soda, Room Air Conditioners, Refrigerators, Automobile Batteries and Electric lamps).
(g) The method of depreciation adopted should be applied consistently from year to year. (This provision covers only the products, such as Motor Vehicles, Electric Fans, Electric Motors and Tractors).
(h) The depreciation figure should be shown separately in all Cost Proformae prescribed with the exception that such information could, if the company desires, be included in the manufacturing overheads of the department or cost centre for the products, such as Cement, Cycle, Rubber Tyres and Tubes, Caustic Soda, Air conditioners, Refrigerators, Electric Lamps and Automobile Batteries only.
(i) Hundred per cent depreciation should be charged on assets specified in Schedule XIV of the Companies Act, 1956.
(j) Extra depreciation for double shift/triple shift working should be computed and charged separately “in the proportion which the number of days for the factory worked double shift/triple shift, as the case may be, bears to the normal working days during the year”.
For this purpose, the normal working days during the year in a non-seasonal factory should be deemed to be as “the number of days on which the factory actually worked during the year or 240 days, whichever is greater”. [Schedule XIV of the Companies Act, 56 on WDV method and rate of depreciation].
B. The Cost Auditor should, while Auditing this Item, keep in mind the Following Important Aspects:
(a) Whether a detailed Fixed Assets Register incorporating the particulars as required under the relevant Cost Accounting Records Rules is maintained and updated regularly.
(b) Whether the cost of any special repairs or renovations, if added to the value of the concerned asset, has been separately recorded indicating the basis on which such additions are made (for specified industries only).
(c) Whether a statement, duly extracted from the Assets Register, showing the cost- centre-wise asset values and their depreciation is prepared. This would assist him in identification and reconciliation of depreciation distribution.
(d) Whether the basis adopted for apportionment of depreciation of common assets to various centres ensures reasonability and consistency.
(e) Whether the depreciation charged is more than or equal to or lower than that chargeable under Section 205 (2) of the Companies Act; In case the actual depreciation is in excess, whether it is separately shown to ascertain the impact on the cost per unit.
The Cost Auditor should check up whether the cumulative depreciation charged in cost exceeds the original cost of the asset. For 100% depreciation written-off assets, he should bear in his mind that he can ignore this criterion only in respect of asset items worth up to Rs. 750 in consideration of ‘materiality’ concept.
He should note that the company is free to adopt any method of depreciation and may even change to another method, and in that event, he must examine as to whether the rates fulfil the criteria set out under Section 205(2) of the Companies Act, and the extent of effect of this changeover on the cost of production. He should also enquire into the reasonableness and adequacy of the rates and methods so changed.
Check Point # 7. Work-in-Progress and Finished Goods Stock:
A. Requirements of Cost Accounting Records Rules:
Although the requirements of the Rules for various products in this respect are different in view of differing nature of fundamental processes of manufacture involved, a general pattern can be outlined into two categories:
(i) Requirements for engineering industries (such as Cycles, Refrigerators, Automobile batteries, Electric lamps, Air-conditioners, Motor Vehicles, Electric Fans, Electric Motors, Power driven Pumps, Industrial Combustion Engines, Diesel Engines, Electrical Cables and conductors).
(ii) Requirements for processing industries (such as Cement, Rubber Tyres and Tubes, Caustic Soda, Aluminium, Industrial Alcohol, Bulk Drugs, Paper, Jute Goods, Cotton Textile, Infant Milk Foods, Vanaspati, Soda Ash, Rayon, Polyester, Sulphuric Acid, Dyes).
For Engineering Industries, the requirements are:
(a) The quantities and values of work-in-progress, if any, in relation to the various components, sub-assemblies, assemblies, final assembly in the process of manufacture at the end of the period for which the costs are made up, should be calculated to represent the cost incurred up to the relevant stage of manufacture and the information exhibited in the relevant Proforma in Schedule II.
(b) The quantities and values of work-in-progress and that of finished products in stock at the end of the relevant period, for which the costs are made up, should be calculated so as to represent the cost of material, labour and overheads separately (with some variations for some of the products).
For example, the valuation of work- in-progress for Motor Vehicles requires this analysis. Similar exercises for other products are also called for adjustment purposes, though Proforma are not prescribed.
Further, the Closing Stock valuation of the finished products should be for each model, type, classification, etc., and the same should take into consideration the adjustments necessary on account of physical verification particularly in case of Electrical Cables and Conductors.
For Process Industries, the requirements are:
(a) The method adopted for determining the cost of work-in-progress should reveal the elements of cost taken into account, and be exhibited in the cost records and applied consistently. The same procedure has been prescribed for finished stocks also.
(b) In case of Vanaspati, the rules provide that work-in-progress should normally include cost of materials, labour and overhead and depreciation, and the basis of arriving at the cost of work-in-progress and finished stock to be indicated in the Cost Records.
From (a) and (b) above, it is obvious that element-wise cost calculations are- necessary with a view to making adjustments for increase or decrease in the work-in-progress and finished stock between the opening and closing balances.
(c) The valuation of closing stocks should be for each type of products/production, as has been specifically itemized including others in the relevant Proforma in Schedule II, and the same should invariably consider the adjustments necessary on account of differences/discrepancies found in physical verification.
B. While Auditing this Item, the Cost Auditor should keep in his mind the Following Important Aspects:
(a) For Work-in-Progress:
(i) The method adopted by the company to ascertain the equivalent good quantities in respect of semi-finished components/sub-assemblies-in-progress/ assemblies awaiting final stage, etc., in the case of engineering industries, and that of the stocks at various processes of production in the case of processing industries, and the measurement yardsticks applied which are definitely different for different processes or operations involved.
In this regard, the Cost Auditor should check up as to:
a. what is the practice normally obtaining in the similar industry;
b. whether the company’s practice is identical or not;
c. whether there are adequate Shop/Process Records to show physical examination and verification, such as Operation Cards or Process Flow Sheets indicating the stages of completion as to material and labour, and
d. whether the person responsible for estimation of work-in-progress is technically qualified.
He should also review the records of similar estimations made in previous years in order to judge the principle of uniformity and the soundness of the system developed.
(ii) The method adopted by the company in the computation of the cost rates separately for material, labour and overheads. In this regard, Cost Auditor should ascertain as to the appropriateness and reasonableness of the share of works administration overheads considered in the relevant Cost Statements.
For the purpose of verification, he should ask for a detailed calculation sheet with a view to ascertaining the extent such overheads are attributable to in bringing the goods/products to such state,
(iii) The valuation is required to be done at actual cost. The Cost Auditor should,- therefore, ensure that standard cost duly adjusted with variations is applied when the company operates Standard Costing System.
(b) For Finished Goods Stock:
The points discussed at (a) (ii) and (a) (iii) above apply, but the Cost Auditor should be aware that a company may adopt a method of valuation different from that adopted for Raw materials or Stores and should, in such case, check up that consistency is being followed by the company.
Check Point # 8. Stock Verification:
A. The requirements of Cost Accounting Records Rules are:
(a) Maintenance of records of physical verification in respect of all items held in stock, such as raw materials, process chemicals, packing materials, consumable stores, machinery spares, fuels, finished goods and fixed assets.
It is to be noticed that the Verification Records in respect of ‘finished goods’ and ‘fixed assets’ are not necessary for certain industries (such as Cement, Caustic Soda, Air-conditioners, Refrigerators, Automobile Batteries, Electric Motors, Electric Fans, Motor Vehicles, Tractors, Rubber Tyres and Tubes, Power-driven Pumps, Internal Combustion Engines, Diesel Engines).
For Engineering industries, such as Motor Vehicles, Electric Fans, Electric Motors, Tractors, Power-driven Pumps, Internal Combustion Engines, adequate physical controls and verification records are envisaged for the items held in stock, such as raw materials, manufactured components, bought-out components and stores.
Physical verification of work-in-progress including shop-manufactured components lying on the shop floor is also a necessity.
(b) The reasons for shortages or surpluses arising out of physical verification should be identified.
(c) The method followed for adjustments in the costs of the product should be disclosed in the relevant records.
B. The Following Important Points should be kept in mind by the Cost Auditor while Auditing this Item:
(a) That there is an adequate system of physical stock verification, perpetual (i.e. continuous stock-taking) or periodical so as to cover all items held in stock.
(b) That appropriate Stock Sheets are used to verify the items.
(c) That there is a proper control over the adjustments of physical discrepancies.
(d) That there is an adequate segregation of duties between the persons responsible for stock verification and those responsible for keeping of stock records.
Check Point # 9. Production Records:
A. The Cost Accounting Records Rules require:
(a) Maintenance of detailed and adequate records showing the quantities and balances of:
(i) different shop-manufactured components/parts, sub-assemblies, assemblies as well as completed products produced, duly classified under model, type size,, specification, etc. as appropriate for the class of engineering industries and as specified in the relevant rules.
1. Cycle Industry.
For components/ Sub-assemblies For complete cycle
such as—Frame, Fork, Handle, Brake set, Pedal Rim, Seat, etc. — by type, size, model.
2. Electric Lamps Industry.
For components for complete product
a. Glass Shells, Glass Tubes, Filaments etc.
b. Lamps/Fluorescent Tubes by type, size, specification (wattage), etc.
(ii) different raw materials, process materials as well as finished products produced, duly classified under the type, quality, packing etc., as appropriate and specified in the relevant rules for the class of processing industries.
B. The Following Important Points should be borne in mind by the Cost Auditor while Auditing this item:
(a) That the quantitative production data are essential for the requirements of Cost Statements. It is, therefore, essential for him to prepare a programme of his own in order to ensure that such records are necessarily linked with the Cost Statements and do provide the necessary information for verifications.
(b) That the production of completed products or finished goods tallies with the figures recorded in Excise Accounts (viz., R.G. I. etc.) and summarised in Excise’s Periodical Returns, Returns of D.G.T.D. and National Sample Survey, etc.
(c) That the records show quantities of production at various intermediary stages of manufacture. This is especially required in Textile, Jute goods, Steel pipes & tubes, etc., where stage-wise conversion costs arc worked out.
(d) That the methods of estimating production, where physical ascertainment is difficult, are realistic and similar to those obtaining in similar industries. For this purpose, the Cost Auditor should check up the very basis, e.g. volumetric measurement and conversion into quantity, working back of stage-wise production from the final output, etc.
He should make use of Process Flow Chart (in case of processing industries, continuous or semi-continuous nature) and process loss norms, input- output analysis, etc., wherever possible.
(e) That the quantity records are there for all individual items when values are maintained in Control Accounts for each product group. The Auditor should ensure that annual reconciliation at least is done by the company, and for this, he should apply test checks to a few transactions right through the documents and Control Ledgers by selecting few items.
(f) That the differences as a result of physical verification arc adjusted in the quantity of process stock for working out process production. This area is quite susceptible to a difference of opinion between the Company and the Cost Auditor, as the company may not agree to a physical stock-taking of process stock on the ground of maintaining Job Cards which show the quantities of Work-in-progress.
(g) That a reconciliation statement is drawn up by the company (by taking extracts from the production records and other relevant records) to show that— Closing Stock (as per physical inventory or estimate) + Process transfers/sales/ despatches—Opening Stock is equal to Production.
Check Point # 10. Statistical Statements/Records:
A. The Requirements of Cost Accounting Records Rules are that there should he:
(a) Adequate and systematic records to show statistical data, such as available machine hours, actual machine hours worked in different departments, etc., with reasons for stoppages (idle time) under classified headings, yield percentage for the various inputs of raw materials/process materials or chemicals/stocks transferred to next process, consumption per unit, production per hour, etc. available/utilised direct labour hours in various departments, etc., on a period basis (monthly or otherwise).
(b) Adequate records to identify as far as possible the capital employed, fresh investments on fixed assets during the year, fresh investments that have not contributed to production, effect of under-utilisation of capacity, etc.;
(c) Statistical statements and other records in compliance with the requirements/provisions of Schedules I and II; and
(d) Records to indicate the assets added as replacement and that they are for increasing existing capacity, etc.; in such a manner as to enable the company to exercise, as far as possible, control over operations and costs, and to provide the necessary information required by the Cost Auditor to suitably report to the Company Law Board on all the points referred to in the Cost Audit (Report) Rules, 1996.
B. In this regard, the Cost Auditor’s prime consideration should be to examine the validity of data with reference to the base records generated and maintained by the company. He should keep in mind the auditing principles of relevancy, consistency, materiality, accuracy and disclosure pattern.