Top 2 Objects of Cost Audit

This article throws light upon the top two objects of cost audit. The objects are: 1. General Objects 2. Social Objects.

Cost Audit: Object # 1. General Objects:

The general objects of cost audit are:

1. To detect the errors of principle of cost accountancy, and frauds that are usually made in the 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 finished goods as accurately as possible,

4. To verify the total cost of each product, process, operation and job to ensure that they are ascertained accurately,

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

6. To verify the inter-company transactions via records showing the details of contracts in respect of Purchase and sale of raw materials, process materials, components, etc., utilisation of plant facilities, supply of plant facilities and consultancy services on administration, technical, managerial, etc. so as to determine the reasonableness or otherwise of the rates charged or paid for such services,

7. To verify the statistical statements and other records furnished to the Directorate General of Technical Development, Central Excise, 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 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.

10. To compare historical cost with those attainable under efficiency audit, and

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 utilization of installed capacity, budgetary control system, inventory policies, key limiting factors causing production ‘bottlenecks’, etc.

Cost Audit: Object # 2. Social Objects:

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

1. Increasing productivity:

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

2. Price fixation and price control mechanism:

The Government’s order to conduct cost audit acts as a counter-weight to the monopolistic attitude of certain industries to increase commodity prices. The role of the Bureau of Industrial Costs and Prices in studying the cost structure and 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 utilisation of national, financial, physical and human resources in these sectors of economy.

4. Identifying uneconomic product line:

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 payment of correct taxes by the industry is also taken care of in the process”.

6. Benefit 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 in respect of 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 they are authenticated by a cost auditor.

“The objective of cost audit is to protect the consumer from unwarranted increase in prices. The consumer has got a right of getting goods and services at a reasonable price. Reasonableness of the prices charged can only be ensured by correct determination of costs and the margin charged by the producers and their retailers.”

“Another object of cost audit is to make the industries covered by such rules alert and efficient and also to make them know their rational cost with a view to reducing it to the extent possible. Thus by resorting to this method the interest of the consumer is safeguarded and it is a definite step towards removal of social injustice.”

Thus, cost audit serves not only the national objectives 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 price.