In this article we will discuss about:- 1. Meaning of Cost Audit 2. Objectives of Cost Audit 3. Important Legal Provisions as to Cost Audit 4. Cost Audit Report Rules, 1996 5. Cost Accounting Records.
Meaning of Cost Audit:
The terminology issued by the CIMA defines Cost Audit as “the verification of the correctness of cost accounts and of the adherence to the cost accounting plan”.
ICWAI defines Statutory Cost Audit as a “system of audit introduced by the Government of India for the review, examination and appraisal of the cost accounting records and added information required to be maintained by the specified industries”.
Cost Audit is a critical review undertaken for the purpose of:
(a) Verification of the correctness of cost accounts, and
(b) Checking that Cost Accounting Plan is adhered to.
From the above definitions, the meaning of cost audit comprises the following:
(i) The verification of Cost Accounting Records, such as Cost Accounts, Cost Reports, Cost Statements, Cost Data and Costing Techniques.
(ii) Examining these records to ensure that they adhere to the cost accounting principles, plans, procedures and objectives.
(iii) Cost Audit is to be conducted with regard to (i) provisions of Companies Act, 1956, (ii) Cost Accounting Records Rules, (iii) Cost Accounting (Report) Rules, and (iv) Cost and Works Accountants Act, 1959.
The Companies Act, 1956 was amended by the Companies Amendment Act, 1974 introducing section 233B empowering the Central Government to order audit of cost accounts for which maintenance of Cost Accounts was prescribed in respect of companies engaged in production, processing, manufacturing or mining activities under section 209(1)(d) such particulars relating to utilization of material, labour or other items of cost as may be prescribed.
Objectives of Cost Audit:
The objectives of Cost Audit is to ensure that in respect of companies engaged in production, processing, manufacturing or mining activities which may be specified by notification issued by the Central Government, proper records relating to utilization of material and labour are available, which would make the efficiency audit possible.
Efficiency Audit will verify and examine whether the funds invested in the business more profitably to ensure the optimum results by looking into the planning of investment and the return for every rupee of capital employed, the Cost Audit ensures Efficiency Audit through:
(a) Determination accurate cost of jobs, materials, finished products, comparing present cost with previous experience.
(b) Making of accurate periodical financial statements for information and guidance of management.
(c) Help in determining prices of finished products by furnishing all relevant data.
(d) Determination and evaluation of production processes and find out what are profitable and what are not profitable items and determine their extent.
(e) Help in planning, operations and stock control.
(f) Determination of efficiency of operations by furnishing data as to cost, volume of production etc.
(g) Distribution of overhead costs in a rational manner.
(h) Help in continuous study and reporting as to material costs, prices, quality of material, transportation costs, plants idleness, production capacity, overhead costs etc., quality of labour, labour costs, waste, depreciation, in all its aspects such as machine deterioration, accelerated depreciation etc.
(i) Helps the management in identification and exploitation of key success factors, determination of capacity utilization, analysis of inventory policies etc.
(j) Ensures that Cost Accounting Plan is in accordance with the objectives set by the management and also in conformity with Cost Accounting System adopted.
(k) Helps in making inter-firm and intra-firm comparisons.
(l) Ensures the reliability of cost data and cost reports prepared for internal management and external agencies like Government, banks, financial institutions, statistical agencies etc.
(m) Serves as a measure to determine the managerial efficiency or otherwise.
(n) Serves as a tool to know whether resources are being properly utilized.
(o) Provides reliable data to the Government for deciding whether to offer any subsidy or extend tariff protection to any particular industry.
(p) Facilitates settlement of industrial disputes.
(q) Ensures that consumers get the product at fair price.
(r) Helps the associations of various industries to compile standard costs against which individual firms may compare their actual cost figures.
(s) Ensures to maintain Cost Accounts in accordance with the principles of costing applicable, to the industry.
(t) Helps in proper valuation of inventory.
Important Legal Provisions as to Cost Audit:
The important provisions as to cost audit under the provisions of the Companies Act, 1956 are given below:
(1) The Central Government by order direct that an audit of Cost Accounts of a company shall be conducted, if in the opinion of the Central Government, it is necessary to do so.
(2) The Cost Audit order can be given by the Central Government only in respect of class of companies which are required to maintain books of account under the provisions of section 209(1)(d) of the Companies Act, 1956.
(3) The Cost Audit order shall also prescribe the manner in which such Cost Audit is to be conducted.
(4) The Cost Auditor shall be appointed by the Board of Directors of the Company with the previous approval of the Central Government. Board of Directors is authorized to fix the remuneration of Cost Auditor.
(5) Section 233B of the Companies Act, 1956 provides that an audit of Cost Accounts of the company shall be conducted by a Cost Auditor, who shall be a Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959.
(6) All the disqualifications which are applicable to a financial auditor are also applicable to the Cost Auditor. The Statutory Financial Auditor himself cannot be appointed as a Cost Auditor of the same company.
(7) The Cost Auditor will have the same rights and powers which can be exercised by a Statutory Financial Auditor under section 227(1) of the Companies Act, 1956.
(8) The Cost Auditor should submit his report to the Central Government and to the company within 180 days from the end of the company’s financial year to which the Cost Audit relates. He should comply with the Cost Audit (Report) Rules, 1996 and amendments thereto from time to time.
(9) It shall be the duty of the company to give all facilities and assistance to the persons appointed for conducting the Cost Audit and give such information in prescribed form to facilitate compilation of the Cost Audit Report.
(10) The company shall within 30 days from the date of receipt of a copy of the Cost Audit Report shall furnish to the Central Government full information and explanations on every reservation or qualification contained in such report.
(11) The Central Government may after considering their report call for any further information or explanation as may be necessary and thereupon the company shall furnish the same within such time as may be specified.
(12) After receiving further information and explanations in this behalf the Central Government may take such action on the report in accordance with any law for the time being in force.
(13) The Central Government may direct the company, if so desired, to circulate to its members along with the notice for the Annual General Meeting the whole or such portion of the Cost Audit report as it may specify.
(14) If default is made in complying with provisions of the sections, the company shall be liable to be punished with fine which may extend to five thousand rupees and every officer of the company who is in default shall be liable to be punished with imprisonment for a term which may extend to three years or with fine which may extend to five thousand rupees or with both.
Cost Audit Report Rules, 1996:
(1) The company and every officer shall make available the Cost Accounting Records to the Cost Auditor for the purpose of Cost Audit within 90 days from the end of the financial year.
(2) The Cost Audit (Report) Rules, 1996 lays down the broad outlines of area of Cost Audit and the Cost Auditor is required to report whether he has obtained all information and explanation, whether proper Cost Accounting Records are kept by the company, whether in his opinion the cost records give true and fair view of the cost of production processing, manufacturing etc.
(3) An annexure to the Cost Audit Report to be given containing report on Cost Accounting System, financial position, production, raw material, power and fuel etc.
(4) The Cost Audit Report shall report on:
(a) Matters which appear to him to be clearly wrong in principle or apparently unjustifiable,
(b) Cases where the company’s funds have been used in a negligent or inefficient manner,
(c) Factors which could have been controlled but have not been done resulting in increase in the cost of production,
(d) Contracts or agreements, if any, between the company and other parties relating to selling, purchasing etc. by bringing out any peculiar features, undue benefits, and
(e) The adequacy or otherwise of budgetary control system, if any, in vogue in the company.
(5) The Cost Auditor shall suggest measures for improvements in performance if any, in respect of the following, namely:
(i) Rectification of general imbalance in production facilities
(ii) Full utilization of installed capacity
(iii) Concentration on areas offering scope for:
a. Cost reduction,
b. Increased productivity,
c. Key limiting factors causing production bottlenecks, and
d. Improved inventory policies,
(6) The Cost Auditor may give his other observations and conclusions, if any relevant to the Cost Audit.
(7) The Cost Audit Report shall be sent to the Central Government and to the company within 180 days from the end of the company’s financial year to which the Cost Audit Report relates.
(8) The Cost Audit Report should be submitted to the Central Government in the prescribed form in triplicate.
(9) The Cost Auditor shall give clarifications, if any, required by the Central Government on the Cost Audit report within 30 days of the receipt of the communication in this behalf.
(10) If the Cost Auditor qualifies his report, he should indicate the extent to which he has qualified the report and the reasons therefor.
Cost Accounting Records:
The records contemplated under section 209(1 )(d) of the Companies Act, 1956 would include all the accounting reports maintained by the company and made available for audit by the Financial Auditor.
In addition, the following records would also have to be maintained:
a) Raw material consumption of register/report.
b) Production report.
c) Rejections/wastages/scrap report.
d) Report on stoppage of machines with reasons.
e) Idle time report with reasons.
f) Machine utilization report.
2. Work-in-Progress and Finished goods:
a. Process stock register – cost centre-wise and product-wise.
3. Repairs and Maintenance:
a. Works order register/card showing material and spares consumed and labour utilized.
b. In case of workshop, additional records.
4. Utilities (Steam, Power, Water):
a. Record of inputs and outputs.
b. Record of cost centre-wise allocation of outputs.
5. Raw Materials and Stores:
a. Goods received register
b. Bin cards
c. Materials/Stores ledgers
6. Wages and Salaries:
a. Attendance registers/sheets,
b. Wages/salary sheets, and
c. Leave and gratuity payments.
a. Details such as production hours, labour hours, machine hours to facilitate distribution to production.
8. Cost Accounts:
a) Overheads analysis register,
b) Cost centre wise assets register,
c) Product ledger,
d) Annexure and Proforma as per the rules, and
e) Reconciliation of profit/loss as per cost records and financial records.
Sales analysis by products