Top 4 Practical Benefits of Cost Audit Report

This article throws light upon the top four practical benefits of cost audit report. The practical benefits are: 1. Material Consumption 2. Material Usage 3. Cost of Services 4. Control Over Expenditure.

Cost Audit Report: Practical Benefit # 1.

Material Consumption:

In order to comply with the rules, a Record of item-wise receipts of all major materials is necessary so as to include the following information, viz.

A cursory glance of the above would reveal the following features:

(a) Fluctuations in the rate of materials purchased from various suppliers,

(b) Trend in the landed cost of materials,

(c) Trend in the rates of materials, and

(d) Abnormality in any item in any of the consignments received.

This will help the management to explore the possibilities of:

(a) Changing the source of supply and/or mode of despatch,

(b) Sales tax management,

(c) Developing alternative transport if the element of freight is substantial, and

(d) Changing the clauses of insurance policy, if called for, etc.

Cost Audit Report: Practical Benefit # 2.

Material Usage:

This analysis could reveal the following features:

(a) Abnormal difference in consumption of any particular raw material or process material,

(b) Abnormal drawal of material on any particular day or month,

(c) Identification of events for excessive material consumption on some particular day, etc.

Keeping in view the correlation of output and input and the knowledge of actual consumption, the management may draw ‘regression curves’ for its in-depth analytical studies for future course of action. Again, Proforma A of Schedule II of the Rules provides for the comparison of the raw materials consumption and cost between their standard and actual for the current year as well as for the previous year.

Such analysis would obviously encourage the higher management to inquire into the areas where deviations are singularly noticed.

Cost Audit Report: Practical Benefit # 3.

Cost of Services:

The Rules specifically demand maintenance of detailed records to ascertain the cost of Services/Utilities such as power, fuel, water, steam, electricity, etc.

These detailed information break-ups could reflect:

(a) Abnormal consumption of materials used for the generation of steam/hot oil, etc.,

(b) Under-utilisation of capacity, and

(c) Time lost due to breakdown, and so on.

Furthermore, if the cost is substantial, the services utilised over the year are reconciled with the services generated. The factors, like leakages, abnormal losses would come to light this way.

Cost Audit Report: Practical Benefit # 4.

Control Over Expenditure:

While complying with the requirements of Proformae A and B (Schedule II) of the rules and those of Proforma E (total expenses incurred and share applicable to Bulk Drugs activity), the total expenditure of the company is thoroughly analysed and an attempt is made to allocate the expenses to the Drugs activity and other activities.

The preparation of a statement (illustrated below) necessary for the prescribed cost proformae would definitely give a clear view, to the management, of the volume of expenditure under various account heads.

The above analysis correlated with the physical determinants of operations could benefit the management to have better:

(a) Manpower planning—for reduction in salaries and wages,

(b) Inventory planning—for reduction in interest cost,

(c) Maintenance scheduling—for cost control,

(d) Expenditure planning—for quality, research, etc.

Again the Proforma D (Part II) showing the Finished Stocks of Bulk Drugs, Interme­diates, Self-manufactured ingredients and substances, both in quantity and value under opening stock, production, sales, captive consumption, closing stock could assist the management in formulating the ‘budgets’ for the future periods.

Thus, cost audit is neither evil nor burdensome. The cost audit report, in fact, can work as a ‘catalyst’ to the existing management information system.