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Cost Audit Full
Cost Audit Full
Concept
As its clear from the name Cost Audit is the Audit of cost, i.e. and costing methodologies followed by any production/ manufacturing organization.
It is the process of verification of cost accounts which includes all the aspects that add to the cost of production/ manufacturing/assembling of certain kinds of goods.
Definition
According to I.C.W.A. ( Institute of cost and works accountant of India): Cost audit is an audit of efficiency of minute details of expenditure while the work in progress, and not a post mortem examination. Cost Audit is mainly a preventive measure, a guide for management policy and decision, in addition to being the barometer of performance.
Evolution
In India the evolution of cost audit can be traced from the era of the World War II. The government made a lot of purchases in order to fulfill the requirements of the armed forces.
The govt. was willing to purchase big lots of goods in low cost.
Evolution Cont
The Suppliers faced problem in quoting prices as the cost of variable inputs was fluctuating.
In order to resolve this issue the govt. started entering into a cost-plus contract with the suppliers. Under this, the Govt. verified the cost incurred and then added up a certain percentage of total verified cost to get the amount payable by the government.
Evolution Cont
After Independence Govt. took steps to study the cost aspects of production and developed a system of control over the Prices by checking the authenticity of costs being showed. This ensured fair price to consumer and fair remuneration to manufacturer.
In case the transport cost of raw materials is a significant element of cost, as in the case of cement and sugar industry, the transport cost is determined separately. In case of imported raw materials, the various elements are: FOB value, ocean freight, insurance, custom duty, clearing/forwarding and inland freight.
Data for raw materials consumption have to be provided for the year under audit, as well as for the previous two years, for comparison.
2) Material Consumption
i. Material consumption is worked out by deducting closing inventories, from the receipts and adding opening balance.
ii. Consumption of materials should be carefully checked with the issues to production processes. iii. Provisions of the cost accounting record rules should be kept in mind, as the rules also specify accounting requirements for raw materials and other direct and indirect materials.
4) Inventory Valuation
i. The various inventory cost formulas (LIFO, FIFO, HIFO), weighted average cost, base stock, specific identification, latest purchase price have different effect on costing and asset valuation.
ii. If an entity follows a formula which is different from the one generally followed by the industry, it should be specially commented upon by the cost auditor in his report.
5) Depreciation
i. Cost accounting record order/rules require that record of all fixed assets, in respect of which depreciation is to be provided, shall be maintained.
ii. Depreciation is charged according to the depreciation policy of management, which may be on a straight line or reducing balance method, based on the useful life of the asset. iii. Any basis adopted should be consistently followed. If any basis, other than the useful life of the asset, is followed, the impact of providing excess or less depreciation should be pointed out.
The basis of allocation/apportionment of overhead cost to cost centers should be in accordance with the
i. Accepted principles of cost accounting.
ii. Quantification of services rendered by service departments to cost centers. iii. On the basis of activities which are cost drivers.
1. Proprietory Audit
Cost audit as a basis of proprietary audit serves the following ; Whether the expenditure is appropriate and not more than what the situation demands.
Whether any personal benefit has accrued to the sanctioning authority as a result of this expenditure.
Whether the expenditure has indeed served the purpose for which it has been incurred. Whether the prescribed rules and regulations have been duly followed.
2. Efficiency Audit
In identifying the areas of inefficiencies and weaknesses.
2) To the Shareholders
3) To the Consumers 4) To the Government 5) To the Society
2) To the Shareholders
i.
3) To the Consumers
i. It Helps In The Fixation Of Fair Prices ii. Increase In The Standard Of Living
4) To the Government
i. Improve working of uneconomic industrial units
ii. Guidance
iii. Helpful in providing cost statements & other relevant information iv. It facilitates the settlement of trade disputes
v.
5) To the Society
i.
ii. Justification of price increase by increase in cost of production iii. Reduces the prices
C.
` 2,000
Cont..
Appropriate documents are required to be furnished along with application for exemption : (i) True copy of complete Annual Report containing balance sheet and profit and loss account for the year for which exemption is being sought along with copies of the same pertaining to preceding two years. (ii) An affidavit containing full facts of capacity utilization turnover and financial status of the company, duly signed by two Directors of the company and authenticated by a Notary Public. (iii) A brief note/status report on steps taken by the management for revival of the said unit.
Criticism (cont..)
Finally ....
It is wrong to say that Govt. will interfere in the work of management rather it will help them with valuable informations. The role of cost auditor is constructive as he may recommend a number of improvements in the working of organization.
Bibliography
Advanced Auditing and Professional Ethics, Volume-1, Board of Studies ,The Institute of Chartered Accountants of India (ICAI). Basu S.K. Auditing Principles and Techniques, Pearson Education, 2nd Edition 2007.
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