Cost Audit: Unique Feature and Concept

After reading this article you will learn about Cost Audit:- 1. Unique Feature of Cost Audit 2. Concept of Cost Audit.

Unique Feature of Cost Audit:

The audit of cost accounts has attained its present status in the statute book of our country through a gradual process of industrial development and socio-economic expectations. During World War I, a large number of firms were given contracts by the Government “on a cost-plus basis”, and the defence establishments used to verify and investigate the costs structure.

The statutory cost audit started in the year 1965 when the Companies Act, 1956 incorporated the provision for cost audit in clause (d) to Section 209 and to Section 233B. This provision was made on the basis of recommendations from Vivian Bose Commission, Dutta Commission and Shastry Committee, where it was thought necessary to institute proper cost accounting system in the industrial sector of our economy.

They felt that the financial audit had its own limitations to satisfy the Government, shareholders and public with regard to the valuation of inventory, cost of goods produced and sold, and work-in-progress.

In addition to Section 233B of the Companies Act, 1956 the Cost Audit (Report) Rules, 1996 came into existence prescribing the time and manner and the format of the Cost Audit Report. The unique features of statutory cost audit can be best understood by the purposes it serves and the potentials it possesses.

The purposes of cost audit are:

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

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

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

iv. To institute cost consciousness,

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

vi. 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.

Cost audit as a profession has immense potentialities in India particularly in the context of present state of affairs, viz., underutilization of productive capacities, low rate of productivity, wastage of national, physical, financial and huge manpower resources and inefficient management of industrial enterprises.

As a discipline, the ascertainment of true and fair view of cost of different products is definitely a major objective of cost audit, but it is not all. An offshoot of cost audit is the determination of the levels of efficiency at which the companies engaged in manufacturing, processing, and mining activities have been operating.

The management is afforded an opportunity to determine the movements of costs both total and various components of different products produced in conditions of varying product-mix, varying capacity utilisation, varying market prices and varying market segments.

Data thrown up by cost audit offer a unique opportunity, at the level of the Government, to compare efficiency levels of different firms brought under cost audit. The cost information available under this kind of audit also appears highly logical in the context of formulation of export incentive policy, drawbacks, refunds, reliefs, etc.

The inquiries made by the Tariff Commission and the Bureau of Industrial Costs and Prices can be further strengthened by audited cost data towards the establishment of a flexible pricing policy, flexible vis-a-vis changing conditions in different products and industries. Similarly, data on cost can be effectively utilised by the Monopolies Commission in the exercise of their powers under the MRTP Act.

Presently, statutory cost audit is limited to 43 industries only and the scope to cover other industries is vast. It is hoped that more and more number of industries would come under the purview of compulsory Cost Accounting Rules and Cost Audit Orders in the near future, and the information of varying degree and nature that would emanate from cost audit discipline would be used profitably and intensively for purposes of both national and enterprise policy.

Concept of Cost Audit:

The Chartered Institute of Management Accountants, London, defines Cost Audit as “the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”

Thus, cost audit extends to:

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

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

Cost 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 definition of cost audit, by CIMA, London, does not go beyond the verification of the accuracy of cost accounting records, and it emphasizes the need to ensure that cost accounting routine laid down by the concern has been properly carried out.

The Institute of Cost and Works Accountants of India defines Cost Audit as “an audit of efficiency, of minute details of expenditure while the work is in progress and not a post-mortem examination. Financial audit is a ‘fait accompli’. Cost audit is mainly a preventive measure, a guide for management policy and decision, in addition to being a barometer of performance”.

This definition is much wider in its concept and scope than that of the CIMA, London. This 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 the investment between different functions of the concern so as to give optimum results. The object of clause (d) incorporated under Section 209 of the Companies Act. 1956 is to make ‘efficiency audit possible’.

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.