This article throws light upon the six main classifications of contents in the cost audit report. The classifications are: 1. Statutory Affirmations 2. Objective Statement of Findings 3. Statement of Facts 4. Re-Statement of Figures and Data 5. Statement of Opinion or Facts on Matters requiring Professional Competence 6. Statement of Opinion or Facts on Matters Relating to Management Performance.
Contents in the Cost Audit Report: Classification # 1.
These require the Cost Auditor to state categorically whether or not his requirements relating to five paragraphs on fifteen specific points have been fulfilled.
Contents in the Cost Audit Report: Classification # 2.
Objective Statement of Findings:
These include: comparison of actual with standards, non-moving stock, written-off stock, inventory valuation, references to abnormal features affecting production thereby having their effect on the cost of production (i.e., abnormal non-recurring costs), power/fuel/utilities, and consumption per unit of production — for each type/variety.
Contents in the Cost Audit Report: Classification # 3.
Statement of Facts:
These include: Method of depreciation adopted by the company, basis of allocation of overheads and the detailed factual data relating to the company in respect of matters such as:
(i) Date of first commencement of commercial production,
(ii) Location of factories,
(iii) Location where cost accounts are kept,
(iv) Licensed capacity and the extent of its utilisation,
(v) Process of manufacture along with a flow chart of the product under reference,
(vi) Activities other than the product under reference,
(vii) Loan license/job work arrangement, and
(viii) Foreign technical collaboration, etc.
Contents in the Cost Audit Report: Classification # 4.
Re-Statement of Figures and Data:
(i) A statement of the company’s financial position, such as Capital employed, Net worth, Profit before tax and ratio in terms of value and as percentage for the company sales, operating profit, value addition as a whole and for the product under reference, current ratio, debt-equity ratio, stocks of raw materials, stores & spares, WIP and finished goods in terms of number of months of consumption, production cost and cost of sales, respectively;
(ii) Statistics relating to Production job work, loan license and other similar figure:
(iii) An analysis of expenditures restated in terms of costs per unit of output (e.g., direct labour cost, stores and spares, etc.) and reason-wise analysis of idle man-days for both direct and indirect workers, etc.;
(iv) Working capital requirement in terms of no. of months of cost of sales excluding depreciation, power/fuel/utilities’ costs, salaries and wages, repairs & maintenance, overheads, R&D expenses, Royalty & technical know-how charges, quality control/pollution control expenses, sales, capitalisation of revenue expenditure, central excise reconciliation, profit reconciliation, etc.
Contents in the Cost Audit Report: Classification # 5.
Statement of Opinion or Facts on Matters requiring Professional Competence:
These include comments on:
(i) The cost accounting system — adequacy or otherwise to determine the cost of production of the product;
(ii) The basis of charging depreciation to the cost of production;
(iii) The basis of allocation of overheads to cost centres and the manner of absorbing overheads to products;
(iv) The adequacy or otherwise of the Budgetary Control System;
(v) Possibilities of improvement in performance by cost reduction, improved inventory policies, and scientific methods of locating and correcting factors causing bottlenecks;
(vi) Margin per unit of output, and competitive margin against imports.
Contents in the Cost Audit Report: Classification # 6.
Statement of Opinion or Facts on Matters Relating to Management Performance:
This is really an expression of opinion on ‘efficiency’ and ‘propriety’ which would fall broadly under the classification of Management Audit or Management Evaluation.
These include the following major areas:
(i) The incentive schemes for wage payments indicating their contribution towards increased productivity and reduced costs;
(ii) Cases where the company’s funds have been used negligently or inefficiently;
(iii) Controllable factors which have not been controlled resulting in increase in the cost of production;
(iv) Review of agreements and contracts relating to selling, purchasing, foreign collaboration, etc.;
(v) Suggestions for improvement in performance by production capacity balancing, cost reduction, capacity utilisation, etc.;
(vi) Measures taken for the conservation of energy and their impact on the unit cost of production of the product; and
(vii) Value addition and distribution of earnings, and related party transactions.