Here is an essay on ‘Cost Audit’ especially written for school and college students.

Essay # 1. Definition of Cost Audit:

1. “Cost audit is the verification of the correct­ness of cost accounts and of the adherence to the cost accounting plan.” [ICMA Termmology]

2. “Cost audit is an audit of efficiency, of minute details of expenditure while the work is in progress and not post-mortem examination. Cost audit is mainly a preventive measure, a guide for manage­ment policy and decision, in addition to being a barometer of performance.”

Thus, cost audit comprises:


(1) Verification of the accuracy of the cost ac­counts in so far as the cost ascertainment of pro­cesses, production, or services, or products are con­cerned, and

(2) Check on the adherence to the de­tailed systems of cost accounting and its related records and documents, either through own initia­tion of business concern or on the issuance of an order for cost audit by the Central Govt. under the provisions contained in the Indian Company Law.

This audit when introduced under the strength of a statute or law is called Statutory Cost Audit. The Institute of Cost and Works Accountants of India 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 specified industries.”



The ICWAI’s definition of Cost audit is much wider in its concept and scope than that of ICMA. The ICWAI’s definition puts emphasis on the evaluation of the efficiency of operations and the propriety of management actions and decisions and executive policies and programmes.

In this sense, cost audit is synonymous with efficiency audit as it ensures that every rupee invested in the concern gives the optimum return, and further en­sures the balancing of investments between differ­ent functions so as to give optimum results.

The concept of cost audit also includes propri­ety audit as it seeks to highlight the cases where the company’s funds have been used in a negligent or inefficient manner and the factors which could have been controlled but have not been done resulting in increase in the cost of production.

Essay # 2. Purposes of Cost Audit:

The purposes of cost audit are:


1. To see that the cost accounting principles have been properly followed in the maintenance of cost accounts records in the manner and in the forms as prescribed under the relevant Cost Accounting Records Rules.

2. To compare historical or actual costs with those attainable under efficiency audit.

3. To examine earning, efficiency or inefficiency of the organisation and optimize the use of resources national, financial, physical, and human, and to achieve the rated capacity of the organisation.

4. To institute cost consciousness.


5. To facilitate inter-firm comparison of costs, sell­ing price fixation, tariff rate determination.

6. To ensure, in the sense of propriety and effi­ciency:

(a) Whether the planned expenditure would give optimum results.

(b) Whether the size and channels of expendi­ture were designed to produce best results, and


(c) Whether the return on the capital employed could or could not be improved by adopting some alternative plan of action.

Essay # 3. Objects of Cost Audit:

General Objects of Cost Audit:

1. To detect the errors of principle of cost account­ing, and frauds that are usually made in cost records.

2. To verify the adequacy of the books of account and records relating to cost.


3. To arrive at the value of work-in-progress and closing stock of finished goods as accurately as possible.

4. To verify that the cost records have been duly reconciled periodically with the financial books of account so as to ensure accuracy.

5. To verify that the total cost of each product, process, operation and job is ascertained accurately.

6. To verify the inter-company transaction via records showing the details of contracts in respect of:


(i) Purchase and sale of raw materials, process materials, components, etc.

(ii) Utilisation/supply of plant facilities and consultancy services on ad­ministration, technical, managerial, etc., with a view to determining the reasonableness or otherwise of the rates charged or paid.

7. To verify the statistical statements and other data furnished to the Central Excise, and Directorate of Technical Development, etc., so as to see that these are reconciled.

8. To assist the management by highlighting defi­ciencies or inefficiencies in the use of material, la­bour, and machines.

9. To compare historical costs with those attain­able under efficiency audit.

10. To prevent undesirable practices on the part of the management and thus, exercise control on the whole of the expenditure by thorough analysis of the productive and non-productive factors.


11. To advise the management for the adoption of alternative courses of action by preparing cost plan, especially in regard to: rectification of general imbalance in production facilities, fuller utilisation of installed capacity, budgetary control system, in­ventory policies, key limiting factors causing pro­duction bottlenecks.

Social Objects of Cost Audit:

Social Objects of Cost audit are to protect the interest of shareholders, stopping erosion of the value of capital, production of quality products at reduced prices, control of inflation, and overall im­provement of socio-economic structure by higher productivity and higher national income, etc.

The aforesaid objectives can be achieved in the manner stated below:

1. Increasing Productivity:

Efficient management of material and labour and optimum utilisation of installed capacities increase productivity. Cost au­dit brings to light these factors and so aids the man­agement and the Govt. to bring about improvements of the existing economic condition of the country.

2. Price Fixation and Price Control Mechanism:

The Govt.’s Order to conduct cost audit acts as a counter-weight to monopolistic attitude of certain industries to increase commodity prices. The role of the Bureau of Industrial Costs and Prices in studying the cost structure in fixing the prices in the right direction benefits the society.

3. Cost Consciousness in Both Public and Private Sectors:

Compulsory maintenance of cost account­ing records is also applicable to the public sector companies. Cost audit creates cost consciousness in respect of the use of national, physical, financial and human resources in these sectors of economy.

4. Identifying Uneconomic Product Lines:

Cost au­dit, aimed at locating uneconomic product, gives a clue to the industry to divert their resources into productive and remunerative channels which in turn serves the society.

5. Guard Against Evasion of Tax:

Cost audit en­sures correct valuation of the work-in-progress and stock-in-trade, and eliminates the tendencies of in­flating costs and reporting least profit of the busi­ness. So, “The interest of the Government regard­ing the payment of correct taxes by the industry is also taken care of in the process.”

6. Benefits to Consumers:

ICWAI observes, “Cost audit aims at increasing the added value through increased profitability per unit of input or resources. This added value can be shared by all the partici­pants and certainly part of the benefit may reasonably be expected to be passed down to the consumer by way of reduced prices.”

7. Foreign Exchange Earnings:

In a foreign mar­ket, the products are highly competitive as to both quality and price. Application of marginal costing technique either to accept or to reject or to improve uneconomic line of operation calls for a more reli­able and sophisticated data .Cost audit can ensure such data as these are authenticated by a cost audi­tor.

8. Employment Generation:

Effective utilisation of men, materials, and money generates surpluses giving scope for new investment opportunities, and thus, benefits the society for new employment opportunities. Thus, it can be concluded that cost audit is a part of social audit and it serves not only the na­tional objective of conserving productive resources for further expansion of economy and employment but also the social objective of making available to the consumer manufactured products at reasonable prices.

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