Cost Audit by Nikhil Gupta Sir

Cost And Management Audit
(Paper 19 of Final Course - Syllabus 2016)
By CA CS CMA Nikkhil Gupta

Updated for the amendments in
study material till January 2019
Classes Organised at:
Priyanka Saxena Classes

(A premier coaching institute for the aspiring Cost and Management Accountants)
1/44, First Floor, Lalita Park (near Gurudwara), Laxmi Nagar, Delhi – 92
Ph.: 011-42333521, 9818010663, 9811554605; Email – nikhil10b@rediffmail.com
- canikkhilgupta@rediffmail.com
For videos on various topics of Cost and Management Audit, check out the YouTube
channel – CA CS CMA Nikkhil Gupta
Salient features of the book
Includes comprehensive coverage of the entire syllabus prescribed by the Institute
Includes discussions on latest circulars / notifications issued by the Ministry of Corporate Affairs
Includes discussions on guidance notes on various topics issued by the Institute
Includes the Frequently Asked Questions (FAQs) issued by the Institute
Includes amendments prescribed by the Companies (Cost Records and Audit) Amendment
Rules, 2017
Includes limited revisions (prescribed w.e.f. April 2017) in Cost Accounting Standards (‘CAS’)
Includes opinions of Expert Advisory Committee (‘EAC’) on recent issues related to CAS
Includes plethora of practical questions to practice each topic appropriately
Includes complete coverage of theory portion prescribed by the Institute
Includes comprehensive coverage of objective type question
Includes the revisions suggested by the Institute in January 2019
Students are advised to refer to the handwritten notes alongwith this book
For CMA Final Paper 20 – Business Valuation

Management and Strategic Performance
Management refer the e-book by Nikkhil Gupta sir
and the handwritten notes available on
www.aggarwallawhouse.com.
Stockist and distributors in Delhi:
Sai Photocopier +91 8800865492. The hard copy of
the book and notes can couriered to your
respective city.
Earnest Gratitude
Dedicated to my grandfather Late Shri Sushil Chand Gupta who

has been a constant source of inspiration for me throughout….
Special mention of my brother CA Mukul who has been a great

support always…
Last but of course not the least my mother Meenakshi Gupta whose
untiring efforts have always bore fruits for me… Thanks Mom!!
CONTENTS
 Basics of Cost and Management Audit…………………………………….1.1
 Companies (Cost Records and Audit) Rules, 2014*……………………….2.1
 Cost Auditor – professional ethics and responsibilities…………………...3.1
 Overview of Cost Accounting Standards and GACAP……………………4.1
 Overview of Cost Auditing Standards (CAS)……………………………..5.1
 Filing of Cost Audit report to MCA [In XbrL Format]……………............6.1
 Management reporting Issues under Cost Audit@.……..…….…………....7.1
 Basics of Management Audit…………………………………………….. 8.1
 Management Audit in different Functions..……………………………... 9.1
 Internal Control, Internal Audit and Operational Audit #……………….. .10.1
 Cost Audit Documentation and Audit Process………………………….11.1
 Objective Type Questions………………………………………………..12.1
Annexures:
1. Companies (Cost Records and Audit) Rules, 2014 (as amended till the
Amendment Rules, 2017)………………………………………………..1
2. Forms CRA-1 [prescribes particulars relating to the items of costs to be
included in the books of accounts]……………………………...............10
3. Form CRA 2 – [prescribed for appointment of cost auditor]…………..31
4. Form CRA 3 – [prescribed for filing the Cost Audit Report to the
Company] …………………………………………………….................35
5. Form CRA 4 – [prescribed for submission of Cost Audit Report to CG
(alongwith management’s comments on reservations /
qualification)]……………………………………………………………52
* @
as amended by the Amendment Rules, 2017 includes “Case studies on performance analysis”
#
includes “Internal audit in different sectors”
Cost and Management Audit 1.1
Basics of Cost Audit
Section 148 of the Companies Act, 2013
(1) Notwithstanding anything contained in this Chapter, the Central Government may, by order, in respect of such
class of companies engaged in the production of such goods or providing such services as may be prescribed1,
direct that particulars relating to the utilisation of material or labour or to other items of cost as may be
prescribed shall also be included in the books of account kept by that class of companies:
Provided that the Central Government shall, Which is the regulatory body
before issuing such order in respect of any class (constitued under the special Act),
of companies regulated under a special Act, whom the CG needs to consult?
consult the regulatory body constituted or
established under such special Act.
(2) If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit
of cost records of class of companies, which are covered under sub-section (1) and which have a net worth of
such amount as may be prescribed or a turnover of such amount as may be prescribed1, shall be conducted in the
manner specified in the order.
Net
Company
Worth / Cost Audit
should fall
Turnover is under sub-
under sub-
above the section 2
section 1
limit
(3) The audit under sub-section (2) shall be conducted by a Cost Accountant in practice who shall be appointed
by the Board on such remuneration as may be determined by the members in such manner as may be prescribed 1:
Appointed
Cost
by the Cost
Accountant
Board of Auditor
in Practice
Directors
Provided that no person appointed under section What is Section 139?

139 as an auditor of the company shall be
appointed for conducting the audit of cost
records:
Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.
Explanation.—For the purposes of this sub-section, the expression ―cost auditing standards mean such standards
as are issued by the Institute of Cost and Works Accountants of India, constituted under the Cost and Works
Accountants Act, 1959 (23 of 1959), with the approval of the Central Government.
1
Which doctor will give the prescription under this section? 

Ph.: 9818010663; Email – nikhil10b@rediffmail.com
- canikkhilgupta@rediffmail.com; YouTube Channel – CA CS CMA Nikkhil Gupta
Definition and Meaning (June 2009)
Cost Audit is audit of cost records. It involves an independent examination of cost books, cost accounts, cost
statements and subsidiary and prime documents with a view to satisfying the auditor that these represent true and
fair view of the cost of production. This includes the examination of the appropriateness of Cost Accounting
system.
“the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”
Chartered Institute of Management Accountants, London (CIMA)
“a system of audit introduced by the Government of India for the review, examination and appraisal of the cost
accounting records and attendant information, required to be maintained by specified industries.”
Institute of Cost and Works Accountants of India
Relevance of Cost Audit (December 2004)
1) Price control and regulation mechanism

2) To provide accurate and authenticate information to the Board of Directors of the company as well as the
Government about the cost and structure of the cost.
3) To assess the performance of the Company in terms of Shareholders Value and Stakeholders Value in terms
of profits of the Company.
4) Good practice in costing should support a range of both regular and non-routine decisions when designing
products and services to :
• meet customer expectations and profitability targets;
• assist in continuous improvements in resources utilisation; and
• guide product mix and investment decisions.
5) Helps protect the interest of Indian companies from allegations of dumping.
6) To become effective against anti-competition activity presupposes the availability of reliable and authentic
cost data.
7) To determine arm’s length price of the transactions entered into with the related parties like inter-unit transfers
8) Ascertaining the actual productivity and wastage
Objectives of Cost Audit (June 2009 and December 2009 & 2011)
1) Verification of cost audit records (as per the methods prescribed by Cost accounting rules and per the cost
accounting system followed by the company)
2) Detection of errors and frauds
3) Determination of inventory valuation
4) Reconciliation of costing records with accounting records
5) It helps government in setting prices of regulated goods.
6) Detection and prevention of abnormal loss of material and time
7) Advising management on ways to improve the performance
8) Promoting Good corporate governance

Social Objectives
9) Facilitation of fixation of reasonable price of products and goods

10) Optimum channelization and utilization of enterprises resources (human, financial and capital) to the most
productive use
11) It helps in cost plus contracts where records of cost play a very important role, such as contracts with
Government
12) Availability of audited cost data as regards contracts containing escalation clauses.
13) Highlighting the areas of inefficiency and mismanagement for the benefit of shareholders and consumers etc.,
such that necessary corrective action could be taken in time
Relevant scheme of law knitted around maintenance of cost records and cost audit
Relevant Section of Provisions

Companies Act, 2013
Books of Accounts - “books of account” includes records maintained in respect of—

Section 2(13)
(i) all sums of money received and expended by a company and matters in
relation to which the receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 in the case of
a company which belongs to any class of companies specified under that
section (December 2017)
Mode of maintenance - books of accounts shall be kept at registered office for every financial year
of books of account – which give a true and fair view of the state of the affairs of the company
Section 128 (Boards of Directors may decide to keep the books and relevant papers at any
other place in India, subject to intimating the RoC, within 7 days of decision)
[Section 128(1)]
- where the company has a branch outside India, books of accounts may be
maintained at that branch office [Section 128(2)]
- the books of account and accompanying papers maintained shall be open for
inspection at the registered office of the company or at such other place in
India by any director during business hours. [Section 128(3)]
- The officers and employees of the Company must cooperate in the inspection
referred to in sub-section (3) above. [Section 128(4)]
- The books of account are to be preserved for atleast eight financial years
[Section 128(5)]
- In case of contravention of the aforesaid provision, the managing director, the
whole-time director in charge of finance, the Chief Financial Officer etc. shall
be punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than fifty thousand rupees but which may
extend to five lakh rupees or with both [Section 128(6)]
Companies required to Empowers the Central Government to specify the rules regarding maintenance of cost
maintain cost records / records and audit of items of cost in respect of certain companies (already discussed

Relevant Section of Provisions

Companies Act, 2013
get cost audit done – earlier in this chapter). If these Rules are not followed (ie. Records are not maintained
Section 148 or audit is not conducted in the prescribed manner, by the company, then penalty under
section 469 is leviable, which is as under:
- For a one-time default - the company and every officer of the company who
is in default shall be punishable with a fine extendable to Rs. 5,000.
- For a continuing default - the fine is Rs. 500 per day till the default
continues.
Qualifications of a Cost Auditor
1) He shall be a cost accountant within the meaning of the Cost and Works Accountants Act, 1959.
2) He shall be holding a valid certificate of practice from the ICAI.
3) He shall be an individual or a firm of cost accountants with atleast 2 partners (in case a firm of cost accountants
is appointed as cost auditors, authentication of the cost audit report is to be done by the signature of any one
of the partners of the firm in his own hand for and on behalf of the firm. The report should not be signed by
merely affixing firm name).
4) Where a firm including a limited liability partnership is appointed as a cost auditor of a company, only the
partners who are cost accountants shall be authorised to act and sign on behalf of the firm.
Restriction on number of cost audits undertaken by a firm of cost accountants (Section 141(3)(g) of the
Companies Act, 2013)
In case a firm appointed as a cost auditor of a company, it shall not hold more than 20 audits (20 companies and
not products should be counted) per partner. The limit of 20 companies would however exclude:-
- One person Companies

- Dormant Companies
- Small Companies
- Private Companies having paid-up share capital of less than Rs. 100 crores
Disqualifications of a Cost Auditor (Section 141 of the Companies Act, 2013)
1) He shall not be a body corporate, other than a limited liability partnership registered under Limited Liability
Partnership Act, 2008
2) He shall not be an officer or employee of the company
3) He shall not be in partnership or in employment of an officer or employee of the company
4) He (including his relative or partner) shall not be indebted to the Company or its associates* for an amount
exceeding five lakhs rupees
5) He (including his relative or partner) shall not be holding any security or any interest or security (of face value
exceeding Rs. 100,000) in the Company or its associates*.

6) He shall not have any business relationship@ with the company or its associates*
7) He shall not be a relative of a director or employee of a) the director; or b) key management personnel of the
Company.
8) He shall not be in full time employment elsewhere.
9) He shall not exceed the ceiling on number of audits prescribed u/s 141(3)(g)
10) He shall neither be the internal auditor of the Company nor the concurrent auditor (A concurrent auditor is a
person holding an office of profit of the company and therefore he cannot be appointed as the cost auditor of
the same company).
11) He shall not be engaged (whether directly or indirectly$), as on the date of appointment, in consulting and
specialised services as provided in section 144#
12) He shall not be convicted by a court for an offence involving fraud and a period of ten years has not elapsed
from the date of such conviction.
If an auditor becomes disqualified after his appointment, under any of the above provisions he shall be deemed to
have vacated his office.
@ Business Relationship includes any transaction entered into for a commercial purpose, except commercial
transactions which are in the nature of professional services permitted to be rendered by a cost auditor or a cost
audit firm under the Act and commercial transactions which are in the ordinary course of business of the company
at arm’s length price - like sale of products or services to the cost auditor, as customer, in the ordinary course of
business.
* Associates would include –
a) Company’s Holding company;
b) Company’s Subsidiary; or
c) Subsidiary of Company’s Holding
# Consulting and Specialised Services specified in Section 144 of Companies Act, 2013: a) accounting and
book keeping services; b) internal audit; (c) design and implementation of any financial information system; (d)
actuarial services; e) investment advisory services; (f) investment banking services; (g) rendering of outsourced
financial services; (h) management services; and (i) any other kind of services as may be prescribed
$ Directly or indirectly implies that:-
(i) in case of auditor being an individual, either himself or through his relative or any other person
connected or associated with such individual or through any other entity, whatsoever, in which such
individual has significant influence or control, or whose name or trade mark or brand is used by such
individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or through its parent,
subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner
of the firm has significant influence or control, or whose name or trade mark or brand is used by the
firm or any of its partners.

Powers of Cost Auditor (Section 143 of the Companies Act, 2013)
- Right to access books of accounts and vouchers at all times (whether kept at head office of the company
or elsewhere)
- To obtain any information from the officers of the company, as it considers necessary for performance of
his duties as a cost auditor.
- To gain access to the information and data required for cost audit such as cost accounting records, cost
statements, Annexure and Proforma to the Report, duly completed as would be required for conducting
the cost audit
Penalties for not complying with Section 141, 143, 144 of the Companies Act, 2013 [Section 147]
Default on the part of Quantum of the penalty
Cost Auditor - For unknowing defaults - fine of INR 25,000 to INR 500,000;
- For knowing / willful defaults - fine of INR 100,000 to INR 2,500,000, and
imprisonment for 0-1 year.
Where the cost auditor is convicted, he/she shall also be required to - a) refund the
remuneration received by him to the company and b) pay damages, if any.
Company - fine of INR 25,000 to INR 500,000
Officer of the Company - imprisonment for 0-1 years and / or

- fine of INR 10,000-INR 100,000
Duties of a cost auditor (December 2008 & 2012 and June 2011)
- To verify and ensure proper books of accounts are maintained by the Company as required by the Cost
Accounting Records Rules. He is also duty bound to verify the returns of those branches which are not
visited by him
- To ensure that the cost audit report and the detailed cost statements are in the form prescribed by Cost
Audit Report Rules and is on the basis of verified data
- To ensure reasonableness of assumptions and basis of allocation and absorption of indirect expenses as
per the established principles
- To qualify the report if there is any need and to give reasons and quantification of that qualification
- Sending cost audit report to the Company within 180 days of the end of the financial year. However, if a
fraud is being or has been committed against the company by officers or employees of the company, the
cost auditor should immediately report to the Central Government.
Communication to previous auditor (Courtesy Letter)
A cost accountant must not accept a position as a cost accountant previously held by another cost accountant in
practice without first communicating with him in writing.

Audit Risk: Audit risk is the risk that the cost auditor expresses an inappropriate audit opinion on the cost
statements.
a) Inherent risk – the risk of expressing an inappropriate audit opinion due to certain inherent features present
in the account / financial statements itself. For example, complex calculations are more likely to be
misstated than simple calculations. Estimation (of say provision of expenses) is in itself a risk of
uncertainty.
b) Control risk – the risk of expressing an inappropriate audit opinion which will not be prevented, or detected
and corrected, by the entity’s internal, operational and management control. This happens due to – (i)
weak internal controls and / or; (ii) possibility of management override of controls. Some control risk will
always exist because of the inherent limitations of internal controls.
Inherent risk and control risk (jointly known as ‘Risk of Material Misstatement’) are the entity’s risks / assertion
level risk; they exist independent of the audit of the Cost Statements. The auditor is required to assess the inherent
risk and control risk as a basis for further audit procedures.
c) Detection risk – the risk that the audit procedures followed by the cost auditor, will not detect a material
misstatement that exists. Detection risk cannot be reduced to zero, because the auditor usually does not
examine all of cost heads, items of cost, or disclosures. Detection risk relates to the nature, timing, and
extent of the auditor‘s procedures that are determined by the auditor to reduce audit risk to an acceptably
low level.
Past Exam Questions
Illustration 1: A company has not maintained cost accounting records though having the obligation under section
148(1) of the Companies Act, 2013. The management is of the opinion that necessary steps could be taken if the
cost audit is also required to be done. Are the directors of the company absolved of the obligation to maintain cost
accounting records?
Solution: As per Section 148(1) every company which pertains to a prescribed class of companies has to maintain
cost accounting records as per Cost Accounting Record Rules. Therefore, management is responsible to maintain
cost accounting records even if no order if passed by central government for cost audit.
Further vide Notification dated 31st July 2018, MCA has required the directors to comment on whether
maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the
Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and
maintained.
Illustration 2: A person has been appointed as cost auditor for 20 products manufactured in seven companies. He
is again proposed for appointment as a cost auditor for 3 more products manufactured by 2 other companies.
Solution: A cost auditor can accept a maximum of 20 cost audits subject to the exemptions prescribed u/s
141(3)(g) of the Companies Act, 2013. The ceiling is on number of companies and not on number of products.
Therefore in the given case, cost auditor can accept the new audits.
Illustration 3: Under what conditions will the appointment of Cost Auditor for conducting Cost Audit be
appointed in firm's name? Who will authenticate such reports and how?
Solution: Appointment of Cost Auditors in firm's name may be done on satisfaction of the following conditions:
(i) All the Partners are practicing Cost Accountants within the meaning of Sections 6 and 7 of the cost
and works Accountant Act 1959 and
(ii) The firm itself has been constituted with the previous approval of the Central Government / Institute
as required under Regulation 113 of the Cost and Works Accountant Act 1959 as amended from time
to time.
When a firm is appointed as Cost Auditors, authentication of Cost Audit Report is to be done by the Signature of
any one of the Partners of the firm in his own hand for and on behalf of the firm. The report should not be signed
by merely affixing firm name.
Illustration 4: Is there any obligation on the part of Cost Auditor to report offence of fraud being or has been
committed in the company by its officers or employees?
Solution: As per the Companies (Audit and Auditors) Rules, 2014, the provisions of section 143 of the Act and
the relevant rules made there under shall apply to a cost auditor also during the performance of his functions under
section 148 of the Act and these rules. As per sub-section (12) of section 143 of the Companies Act 2013, it is
obligatory on the part of cost auditor to report offence of fraud, which is being or has been committed in the
company by its officers or employees, to the Central Government, as per the prescribed procedure under the Rules.
As per the proviso to the above sub-section, it has been stated that in case of a fraud involving lesser than the
specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the
Board in other cases within such time and in such manner as may be prescribed.
Illustration 5: Why does a cost auditor refers to Financial Records while conducting the cost audit of a company?
(December 2014)
Solution: Cost Auditor refers to the Financial Records of the Company for following reasons:-
a) Annexures to cost audit report require detailed information in respect of financial position, capital employed,
net worth, profit, net sales, operating profit, unit cost of power and fuel, total wages salaries, cost of raw
materials consumed, cost of power, cost of stock, employees cost, provision of depreciation, royalty, abnormal
cost scrap, fuel etc. Therefore, to ascertain all this, reference to financial records is made.
b) Under Part II of Schedule VI to the Companies Act, 1956, quite a few matters which are to be mentioned in
the Profit and Loss Account of the company are also to be covered in cost statements such as consumption of
raw materials in quantity and value, sale of finished goods under classified headings in quantity and nature,
actual production quantity of value, inventory in quantity of value for each class of goods, etc.
c) Material discrepancy between financial records and cost records will be highlighted in the reconciliation
statement which would be required that the cost auditor may examine deviation before reporting on the same.

Illustration 6: Is a Cost Auditor required to give any certificate with respect to his/her independence and ‘arm's
length relationship’ with the appointing company? (June 2017 & December 2018)
Solution: Yes, The Cost Auditor of a company is required to give a certificate to the Audit Committee in respect
of his / her / its independence and arm’s length relationship with the company.
Also, according to the Second Schedule, Part 1 clause 4 of The Cost and Works Accountants Act, 1959 it amounts
to professional misconduct when a Cost Auditor expresses his opinion on cost or pricing statements of any business
or enterprise in which he, his firm or a partner in his firm has a substantial interest
Illustration 7: The Companies Act, 2013 has introduced provision regarding rotation of auditors. Is the provision
of rotation of auditors applicable to cost auditors also? (December 2015)
Solution: Section 139(3) of the Companies Act, 2013 is applicable to appointment of auditors (financial), and Rule
6 of Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of auditors and these
provisions are applicable only to appointment of auditors (financial). The Act does not provide for rotation in case
of appointment of cost auditors and the same is not applicable to a cost auditor. It may, however, be noted that
though there is no statutory provision for rotation of cost auditors, individual companies may do so as a part of
their policy, as is the practice with Public Sector Undertakings.
Illustration 8: Define ‘related party’ as per the provisions of Companies Act, 2013.
Solution: As per Section 2(76) of the Companies Act, 2013 “related party”, with reference to a company, means—
(i) a director or his relative;

(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager is a member or director;
(v) a public company in which a director or manager is a director or holds along with his relatives, more
than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
(viii) any company which is—
a) a holding, subsidiary or an associate company of such company; or
b) a subsidiary of a holding company to which it is also a subsidiary;
(ix) such other person as may be prescribed.


Companies (Cost Records and Audit) Rules, 20141

[issued as per the “subordinate legislative power” of the central government given in Section 469]
Rule 2: Definitions
Cost Accountant in practice means a cost accountant as defined in the Cost and Works Accountants Act, 1959,
who holds a valid certificate of practice and who is deemed to be in practice thereof, and includes a firm or limited
liability partnership of cost accountants
Cost auditor means a Cost Accountant in practice, who is appointed by the Board
Cost audit report means the report duly audited and signed by the cost auditor including attachment, annexure,
qualifications or observations etc. to cost audit report
Cost Records means books of account relating to - 1) utilisation of materials, 2) utilisation of labour and 3)
other items of cost as applicable to the production of goods or provision of services as provided in section 148 of
the Act and these rules. (June 2015 & December 2017)
Indian Accounting Standards means Indian Accounting Standards as referred to in Companies (Indian
Accounting Standards) Rules, 2015
Rule 3: Application of Cost Records

Any Company (including foreign company) engaged in production of goods or providing services, specified in the
Tables below, shall be required to prepare cost records for such products or services in their books of accounts:
Category A: Regulated Sector – 6 industries
Industry Regulator
Telecommunication services [It includes Telecom Regulatory Authority of India
transmission or reception of signs, signals, writing, (Telecom Regulatory Authority of India Act,
images and sounds or intelligence of any nature, 1997)
broadcasting services]
Generation, transmission, distribution and supply Relevant Regulatory Authority
of electricity (Electricity Act, 2003)
Petroleum products Petroleum and Natural Gas Regulatory Board
(Petroleum and Natural Gas Regulatory Board
Act, 2006)
Drugs and pharmaceuticals
Fertilisers Relevant Regulators
Sugar and industrial alcohol
Category B: Unregulated Sector - 33 industries
a) Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any
ancillary item or items [Inclusions: Any company which is engaged in any item or items supplied
exclusively for use under this clause, shall be deemed to be covered under these rules]
b) Turbo jets and turbo propellers;
c) Arms, ammunitions and explosives;
d) Propellant powders; prepared explosives (other than propellant powders); safety fuses; detonating fuses;
percussion or detonating caps; igniters; electric detonators;
e) Radar apparatus, radio navigational aid apparatus and radio remote control apparatus;
1
As amended by Companies (Cost Records and Audit) Amendment Rules, 2015, 2016 and 2017. Refer Annexure for the
copy notification of these Rules.

f) Tanks and other armoured fighting vehicles, motorised, whether or not fitted with weapons and parts of
such vehicles, that are funded (investment made in the company) to the extent of ninety per cent, or more
by the Government or Government agencies;
g) Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and
unloading services rendered by a Port in relation to a vessel or goods;
h) Aeronautical services of air traffic management, aircraft operations, ground safety services, ground
handling, cargo facilities and supplying fuel rendered by airports [Exclusions - all airports and aircraft
operations belonging to or subject to the control of the Armed Forces or paramilitary Forces of the Union
are excluded from the scope of these Rules.]
i) Iron and Steel;
j) Roads and other infrastructure projects (It covers Roads, national highways, state highways, major district
roads, other district roads and village roads, including toll roads, bridges, highways, road transport
providers and other road-related services. Hence, every activity including construction and maintenance
of the above projects are covered under the Rules.)
k) Rubber and allied products
l) Coffee and tea;
m) Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical
(including electro mechanical) traffic signaling equipment of all kind;
n) Cement;
o) Ores and Mineral products;
p) Mineral fuels (other than Petroleum), mineral oils etc.
q) Base metals;
r) Inorganic chemicals, organic or inorganic compounds of precious metals, rare-earth metals of radioactive
elements or isotopes, and Organic Chemicals;
s) Jute and Jute Products;
t) Edible Oil;
u) Construction Industry (It covers real estate development, including an industrial park or special economic
zone – contractors as well as sub-contractors)
v) Health services, namely functioning as or running hospitals, diagnostic centres, clinical centres or test
laboratories; [Exclusions – 1) companies running hospitals exclusively for its own employees, provided if
such hospitals are not providing health services to outsiders also in addition to its own employees on
chargeable basis and 2) companies engaged in running of Beauty parlours / beauty treatment]
w) Education services, like imparting training or education by means of any mode. [Exclusions – 1) auxiliary
services provided by companies, as a separate independent entity, to educational institutions viz., (i)
transportation of students, faculty and staff; (ii) catering service including any mid-day meals scheme;
(iii) security or cleaning or house-keeping services in such educational institution; (iv) services relating
to admission to such institution or conduct of examination; 2) services falling under philanthropy (charity)
or as part of social spend which do not form part of any business]
x) Milk powder;
y) Insecticides;
z) Plastics and polymers;
aa) Tyres and tubes;
bb) Paper;
cc) Textiles;
dd) Glass;
ee) Other machinery;
ff) Electricals or electronic machinery;
gg) Production, import and supply or trading of medical devices, like Cardiac stents; Drug eluting stents, heart
valves etc.
Exclusions:
- Foreign companies having only liaison offices in respect to product category (gg) above

- Micro enterprise or a small enterprise as per Micro, Small and Medium Enterprise Development Act,
2006 (‘MSMED Act’).
What is Micro Enterprise and Small Enterprise as per the MSMED Act?
Type of enterprise Manufacturing Industry (Investment in Service Industry (Investment in

Plant and Machinery) Equipments)
Micro < or = Rs. 25 Lakh < or = Rs. 10 Lakh
Small > Rs. 25 Lakh to Rs. 5 Crore > Rs. 10 Lakh to Rs. 2 Crore
Medium > Rs. 5 Crore to Rs. 10 Crore > Rs. 2 Crore to Rs. 5 Crore
Monetary Threshold for applicability of Rule 3 on Table A as well as Table B products is that the overall
turnover of the Company (from all the products / services) during immediately preceding financial year is Rs. 35
Crores or more.
FAQs issued by the Institute

Q: Is there any prescribed format for preparation of Cost records?
A: No, there are no prescribed format. The principles of maintenance of cost records have been notified in the
Rules in CRA-1 (Refer Appendix 1). The principles are in sync with the cost accounting standards. The cost audit
report is required to be in conformity with the “cost auditing standards” as referred to in Section 148 of the
Companies Act, 2013
Q: What is meaning of “Turnover” in relation to the Companies (Cost Records and Audit) Rules, 2014?
A: For the purposes of these Rules, “Turnover” includes
- gross turnover (excluding duties and taxes) from the sale or supply of all products or services during the
financial year;
- any turnover from job work or loan license operations;
- export benefit received;
- scrap sale; and
- trading turnover (December 2015)
Is there any difference between the Section 2(91) of the Companies Act, 2013 defines
definition of “Turnover” as per the the ‘Turnover’ as the aggregate value of the
Companies Act, 2013 and as per realization of amount made from the sale, supply
these Rules? or distribution of goods or on account of services
rendered
For Example: SHANHITA LTD., a manufacturing company, producing Industrial chemicals had the following
income during the year 2014-15: (Amount in Rs. Lakhs)

Sales: Manufactured products 43,750

Traded products 2,830
Income from job Works 780
Sale of Defectives 130
Export Incentives 85
Cash Discount Received 35
Note: Sales inclusive of Excise Duty 2,840
In the above case the turnover of the company as per the Companies (Cost Records and Audit) Rules, 2014 is as
follows:-
Sales: Manufactured products 43,750
Traded products 2,830
Income from job works 780
Sale of Defectives 130
Exports incentives 85 47,575
Less: Excise Duty 2,840
Turnover 44,735
Q: A company does job work for others. The raw materials are supplied to the company by the principal and the
job worker gets conversion charges only. The Job Worker company pays the excise duty which is reimbursed by
the principal. Will the job worker be covered under the Companies (Cost Records and Audit) Rules, 2014?
A: If the products of the Job Worker is listed under Table A or Table B of the Rules and the Job Worker company
meets the threshold limits as prescribed, then the job worker company will be required to maintain cost accounting
records. If the threshold criteria of the cost audit as prescribed are met, the company would be covered under cost
audit also. Payment of excise duty by the Job Worker and in turn getting reimbursement for it is immaterial for
application of the Rules.
Q: The manufacturing process of a company generates Metal Scrap during production of its main products which
may or may not be covered under cost audit. Such scrap is sold in the market after the same is cleared under CETA
Codes that are covered in the Rules. Will the company be covered under cost audit for generation of scrap?
A: Generation of scrap is not a production or processing or manufacturing but is incidental to manufacture of its
main products. The Rules are applicable to production of goods or providing of services. CETA Codes have been
inducted in the Rules for proper identification of Products that are manufactured. The act of payment of Excise
Duty is immaterial in the context of application of the Rules. The generation of scrap and its consequent sale in
the market cannot be construed to be covered under the Rules.
Rule 4: Applicability of Cost Audit

Monetary Threshold for getting the cost records audited:
Category Monetary Threshold (during immediately preceding financial year)
of Rule 3
A Overall annual turnover of the Company (from all the products / Rs. 50 Crore or more
services) and
Aggregate turnover of the individual product(s) / service(s) for Rs. 25 Crore or more
which cost records are prescribed under Rule 3

B Overall annual turnover of the Company (from all the products / Rs. 100 Crore or more
services) and
Aggregate turnover of the individual product(s) / service(s) for Rs. 35 Crore or mosre
which cost records are prescribed under Rule 3
Exclusions:
- Companies whose revenue from exports (in foreign exchange) of the products covered in Table A and B
exceeds 75% of its total revenue; or
- Companies operating from a Special Economic Zone; or
- Companies which are engaged in generation of electricity for captive consumption through captive
generating plant
Illustration: Examine whether cost records and cost audit is applicable in the following situations:
Case Turnover (Rs. Crores) Applicability of
Table A Table B Table A + Other Total Cost Records Cost Audit
Products Products B Products Products Revenue
(A) (B) (C=A+B) D (E=C+D)
Case I 5 10 15 19 34
Case II 5 10 15 25 40
Case III 10 15 25 26 51
Case IV 0 25 25 26 51
Case V 20 14 34 75 109
Case VI 20 20 40 61 101
Illustration: How to determine the percentage to total revenue in the following cases:
(i) In a company who is manufacturing Pharmaceutical products, the revenue from export of
pharmaceutical products earned in foreign exchange divided by total revenue including other
income etc. is 58%.
(ii) The revenue in foreign exchange earned from export of pharmaceutical products plus revenue in
foreign exchange earned from rendering of research & development service divided by total
revenue including other income etc.is 82%.
Solution: The inclusion or coverage of a company under Rule 3 is in respect of products/services listed under
Table-A and Table-B and consequently the computation of 75% is to be calculated for the specific
products/services covered under Rule 3 and not in respect of all the products/services of the company. The total
revenue and turnover of R&D Activities, not being covered under Rule 3 cannot be taken into consideration for
computation of 75%.

Q: Whether maintenance of Cost Accounting records and Cost Audit thereof, is applicable to products which are
for 100% captive consumption? (June 2015 & 2017)
A: In case a product is manufactured and 100% captively consumed for production of some other product which
is also covered under these Rules and is subject to cost audit, then the cost of such captively consumed product
would form part of the final product which is also under cost audit and as such a separate cost audit report for the
captively consumed product will not be necessary.

However, if the product is partly for captive consumption and partly sold, or if the product is 100% captively
consumed for production of some other product which is not covered under these Rules, then cost audit would be
applicable for such captively consumed product(s).
Rule 5: Maintenance of Records

Cost records shall be maintained on a regular basis (monthly or quarterly or half-yearly or annually) in such
manner so as to facilitate calculation of :-
a) per unit cost of production or cost operations;
b) cost of sales; and Refer Annexures
c) margin for each of its product or services for specimen of
Form CRA 1 to 4
Following forms may be used:-
Form CRA 1 – Particulars of item of cost to be included in the books of accounts
Form CRA 2, XBRL format – Appointment of cost auditor (Single CRA 2 is to be filled for all the products and
for all the auditors, if more than one auditor is appointed)
Form CRA 3 – Form of Cost Audit Report
Form CRA 4, XBRL format – Form for submission of Cost Audit Report to CG (alongwith management’s
comments on reservations / qualification)
Applicable fees to be filed while filing Form CRA 2 and CRA 4 with MoCA
Nominal Share Capital (in INR) Fee applicable
Less than 1,00,000 (including companies having no share
capital) Rs 200 per document
1,00,000 to 4,99,999 Rs 300 per document
1,00,00,000 or more Rs 600 per document
In case of delay in filing Form CRA 2 and CRA 4 with MoCA

Period of delays All forms
Up to 30 days 2 times of normal fees
More than 30 days and up to 60 days 4 times of normal fees
More than 180 days 12 times of normal fees

Q: Whether separate Form CRA-2 is required to be filed by a company having two or more different types of
products covered under cost audit?
A: A single Form CRA-2 is required to be filed providing details of the sectors/industries covered under cost
audit and details of cost auditor. For Companies appointing multiple cost auditors, only one single Form CRA-2
is required to be filed. Provision has been made in the Form to accommodate details of multiple cost auditors.
Rule 6: Cost Audit (including procedure of appointment of a cost auditor)
The companies falling in Rule 4, must (through Board of Directors / Audit committee)
appoint a cost auditor within 180 days of commencement of the financial year

The cost auditor must submit the following certificates to the Company that :-
- It is not disqualified for appointment under the Companies Act, 2013 (“the Act”).
- It satisfies the criteria provided in section 141 of the Act.
- The proposed appointment is within the limits laid down under section 141(3)(g)
- The list of pending proceedings against the cost auditor or the audit firm, with respect
to professional conduct, is complete and accurate
The Company must inform the cost auditor about his appointment and file a notice of such
appointment with the CG (in form CRA-2, XBRL format) within 30 days of the Board meeting
(in which appointment has been done) or 180 days of the commencement of financial year
whichever is earlier
Any casual vacancy2 in the office of the cost auditor, shall be filled by the Board of Directors
within 30 days of occurrence of such vacancy and the company shall inform the CG in Form
CRA-2, XBRL format (to be submitted alongwith the board resolution) within 30 days of such
appointment of the cost auditor.
Cost auditor should forward his signed auditors report (in Form CRA-3, alongwith all the
annexures3) to the Board of Directors within 180 days of the closure of the relevant financial
year, post which the cost auditor ceases to hold his office as a cost auditor of the Company.
The Company, within 30 days from receipt of the auditor’s report, shall file a report to the CG
(in form CRA-4, XBRL format) containing full information and explanation on every
reservation or qualification of in the cost audit report
After considering the cost audit report, the Central Government may call for such further
information and explanation from the company, within such time as may be specified. The
company must furnish such
(December 2016)
2
Casual vacancy may occur due to the resignation or death or removal of the cost auditor before its stipulated term.
3
All the annexures to Form CRA-3 must be approved by the Board of Directors before submission to the Cost Auditor to
report thereon.

If a company meets the eligibility criteria (of Cost records

and / or cost audit) in one year and in the subsequent years
even if its turnover is below the specified limits, Rules shall
be applicable for all the subsequent years.
Whether a Company can appoint more than 1 cost auditors
No. of products No. of Auditors Remarks

under cost audit
Single Product Single / Multiple auditor at - Consolidated Report
the option of Company - Signed by all cost auditors
- One principal / lead auditor to be appointed who will be
responsible for consolidation and filing of cost audit
report with the BOD
Multiple Products Single / Multiple auditor at - Consolidated audit report
the option of Company - One principal / lead auditor to be appointed who will be
responsible for consolidation and filing of cost audit
report with the BOD
Illustration 1: What review should be made by a Cost Auditor of Cost Accounting Records?
(December 2013)
Solution: The cost auditor during the course of audit will thoroughly review the cost accounting records as follows:
1) Method of costing in use - Batch, Job, Process etc.
2) System of fixation of cost centres.
3) Procedures for accounting of materials and spares etc.
4) Methods of accounting of wastes, rejections and defectives.
5) System of recording of wages, salaries and overtime and their allocation.
6) Incentive schemes in vogue.
7) Basis of allocation/apportionment of utilities.
8) Method of accounting of depreciation and charging depreciation to cost centres.
9) Method of apportionment of Service Department expenses to production departments.
10) Basis of absorption of overheads to products.
11) Basis of absorption of interest, bonus, gratuity and selling and distribution overheads.
12) Budgetary Control System.
13) Internal Audit System.
14) Method of accounting of Production and Sales.
15) Treatment of research and development expenses.
Illustration 2: What are waste multipliers?

“Waste Multipliers” - The process-wise Cost/kg of output is being worked out for the textile industry. Then these
Costs are aggregated to arrive at the total yarn cost. As there are wastes at each process, the final aggregation of
process to arrive at the finished yarn has to take into Account all such process wise wastages. This is done by using
a factor known as a Waste Multiplier. Accordingly waste multiplier is that quantity of output from any process
which will be needed to get one unit of final output. (June 2013)
Illustration 3: The following details of the process-wise input and output are taken from the Cost Accounting
Records of SUNNY COTTON MILLS LTD., a yarn manufacturing Company, for the year ended March 31, 2013:

Process Input / Output Kgs.

Blowroom Cotton processed 46,72,560
Laps produced 42,58,270
Carding Laps processed 42,74,360
Slivers produced 39,76,400
Draw Frames Slivers processed 39,48,240
Slivers drawn 39,01,800
Roving (Simplex) Drawn Slivers processed 38,74,120
Transferred to Ring Frames 38,31,500
Ring Frames (spinning) Slivers used 39,11,640
Finished Yarn produced 36,41,740
Reeling and Winding Yarn wound 36,35,400
Salable Yarn produced 35,80,880
Required: Calculate the process-wise Waste Multiplier factors for the year ended March 31, 2013.
(June 2013, 2014 & 2018)
Illustration 4: Can cost audit report be made public? (June 2006 & December 2002)
According to the Rules, Cost auditor is required to submit the Cost Audit Report to the Board of Directors of the
company concerned. The shareholders and the general public have no access to the Cost Audit Report unlike the
Financial Audit Report. Cost Audit Report is treated as a confidential document as it contains vital information
which if divulged would affect competitiveness of trade and business of the company whose information is so
divulged.
A Cost Audit Report contains important information such as:

(I) Details of manufacturing process of the Company.
(II) Quantities and rates of various items of input materials, i.e the entire recipe is given.
(III) Quantities and rates of utilities consumed.
(IV) Average sales realization, sales promotion expenses including discount allowed.
(V) Details regarding export market, quantity exported, F.O.B realization etc.
(VI) Any other energy saving measure or technical improvement in process, which a company might have
implemented arising out of its own research.
Such data, as a measure of business strategy should not be made available to the competitors who may take
advantage and put the company to a disadvantageous position. As such cost data is a secret matter and the company
secrets and management strategy contained therein should not be disclosed. It is for the same reason mentioned
above that members of parliament are also not allowed to access Cost Audit Report.
Illustration 5: What is the status of a cost auditor?

The auditor is a watch dog or a whistle-blower and not a blood hound. However, he / she may also suggest
measures for making further improvements in the performance, through cost control and cost reduction. Eg.
Utilisation and balancing of production facilities, sub-contracting, outsourcing etc.
Auditor can comment under the following heads of cost control and cost reduction:
(December 2010)
- Plant capacity: Utilisation and balancing of production facilities
- Sub-contracting / outsourcing – cost and effects
- Inventory holding, inventory carrying on procurement costs
- Quality control and performance evaluation

- Increased productivity of various resources employed

- Standardization and simplification in varieties, product design etc
- Packing and transportation costs
- Change in product mix
- Overheads management
Illustration 6: The following is the abridged Balance Sheet of BEEKAY Ltd.:
(Rupees in lakhs)
Particulars 31.3.2010 31.3.2009
Liabilities
Share Capital 300 300
Debenture Redemption Reserve 30 35
Capital Subsidy from State Government 40 40
Revaluation Reserve 125 140
General Reserve 150 110
Balance in Profit & Loss A/c 63 50
Secured Loans 292 300
Unsecured Loans 110 114
1,110 1,089
Assets
Gross Block 740 690
Accumulated Depreciation (320) (300)
420 390
Capital Work–in–Progress 45 35
Investments 15 17
Current Assets
Inventories 420 430
Sundry Debtors 180 200
Advances for Capital Equipments 25 20
Other Loans & Advances 140 135
Cash & Bank Balances 20 22
Current Liabilities
Sundry Creditors for Others (180) (190)
Provision for Taxes (65) (70)
Miscellaneous Expenses 90 100
Total 1,110 1,089
Note: Term Loan due for repayment within 12 months are Rs.90 lakh (previous year
Rs.85 lakh).
Calculate the following for the company as a whole:
(i) Capital Employed for the year ended 31.3.2010 and in which Annexure No. it is to be
filled up.
(ii) Net worth as on 31.3.2009 and 31.3.2010.

(December 2010; similar question in December 2014)
Illustration 7: The following are extracted from the Annual report of Eastern Industries Ltd. :
(Rs. In Lakhs)
Particulars 31 March 2006 31 March 2005
Share Capital 2,400 2,400
Reserves and Surplus:
General Reserve 21,000 22,200
Debenture Redemption Reserve 11,300 5,700
Revaluation reserve 6,200 7,400
Profit and loss account 200 38,700 2,200 37,500
Secured Loans:
Debentures 48,000 22,000
Term Loans 5,300 14,100
Cash credit 7,800 61,100 7,150 43,250
Unsecured Loans:
Fixed Deposits 2,000 2,250
Interest free sales tax loan 9,000 11,000 7,250 9,500
Total 1,13,200 92,650
Net Block 86,650 72,350

Capital Work In Progress 8,250 1,800
Investments 5,050 5,600
Current Assets, loans and advances 24,900 21,850
Less: Current Liabilities and (11,800) 13,100 (9,050) 12,800
provision
Miscellaneous expenditure 150 100
Total 1,13,200 92,650
Notes :
1) Debentures are redeemable as follows:
- Rs. 120 crores at the end of 5th, 6th and 7th years in equal installments. The earliest date of
redemption is 30 September 2006.
- Rs. 100 crores in five semi-annual installments from 30 June 2006.
- Rs. 260 crores in five semi-annual installments of Rs. 40 crores and one final installment of Rs. 60
crores commencing from 30 June 2010.
2) Term loans and fixed deposits payable before 31 March 2007 – Rs. 1,150 lakhs (previous year – Rs.
4,050 lakhs).
3) Rs. 3,000 lakhs of interest free sales tax loan is repayable on 30 November 2006.
4) Net block includes value of brand equity (brands purchased) Rs. 1,250 lakhs (previous years – Rs. 1,450
lakhs)
You required to calculate the capital employed as defined in the Annexure to the Cost Audit Report.
(December 2006)
Illustration 8: The following details are extracted from the accounts of Super Chemicals Ltd., which manufactures
only one product in a single location:
(Rs. in lakhs)
31.3.2008 31.3.2007 31.3.2006

Gross Fixed Assets 13,845 12,636 11,535
Cummulative Depreciation 3,936 3,789 3,672
Value of trade marks included under fixed assets

(net of depreciation) 240 360 480

Capital Work–in–Process 819 675 951
Investments in Shares & Debentures 2,172 2,136 2,079
Inventories 1,875 1,740 1,533
Sundry Debtors 1,002 951 876
Advances for purchase of capital equipment 72 183 141
Other Loans & Advances 195 174 159
Other Current Assets 96 87 78
Sundry Creditors 642 561 522
Term loans due for repayment within 12 months 100 120 80
Provision for Expenses 87 102 84
Net Sales 11,772 9,636 8,793
Interest 1,842 1,491 1,248
Depreciation 162 141 132
Profit before taxes 696 435 591
Compute the following ratios as required in Part D of the Annexure 4 to the Cost Audit Report for the year
2007–2008 and 2006–2007:
(i) PBT as a percentage of capital employed.

(ii) PBT as a percentage of Sales.
(December 2008)
Illustration 9: The following figures are extracted from the statement prepared by the cost Accountant and the
Trial Balance of ABC Ltd., Which is a single product company:
Year ending
31.3.09 31.3.08 31.3.07
(Rs. in lakhs)
Gross sales inclusive of excise duty 2,040 1,985 1,875
Excise duty 295 280 265
Raw materials consumed 1,140 1,060 975
Direct wages 35 32 27
Power and fuel 30 27 24
Stores and spares 6 5 4
Deprn. charged to production cost centres 16 15 13
Factory overheads–
Salaries and wages 5 4 3
Depreciation 2 2 2
Rates and Taxes 1 1 1
Other overheads 6 5 4
Administrative overheads–
Rates and Taxes 2 2 2
Selling and Distribution overheads –
Packing and Forwarding 6 6 5
Depreciation 1 1 1
Interest 85 74 68

Bonus and Gratuity 12 10 9

Gross current Assets 840 724 640
Current liabilities and Provisions 324 305 246
You are required to compute the following ratios as per Companies (Cost Records and Audit) Rules,
2014 –
(i) PBT as percentage of value addition

(ii) Value Additions as percentage of Net Sales
Note: The Computation should be based on EBDIT as Profit

(June 2008, June 2011, June 2010 and December 2013)
Illustration 10: What would be the treatment of cost of consumption of electricity from a captive generating plant
and the applicability of Cost Audit to such captive generating plants? (June 2018)
Solution: As per Rule 3(A)(2), of the Companies (Cost Records and Audit) Rules, 2014 amendment dated 14th
July, 2016 dealing with generation, transmission, distribution and supply of electricity, all companies having
captive generation of electricity, whether covered under Audit or not shall be required to maintain Cost Records.
It may be noted that, in case of a company whose product(s)/service(s) are covered under the Rules and it consumes
electricity from the captive generating plant, determination of cost of generation, transmission, distribution and
supply of electricity as per CRA-I would be mandatory since the cost of consumption of electricity has to be at
Cost. Hence, maintenance Cost Records for generation, transmission, distribution and supply of electricity would
be applicable. However, Cost Audit will not be applicable to such captive plants, provided the entire generation is
consumed captively and no portion is sold outside.
Illustration 11: From the following figures extracted from the financial and cost accounting records, you are
required to compute:
(i) Value Added.
(ii) Ratio of Operating Profit to Sales.
(iii) Ratio of Operating Profit to Value Added.
Particulars Rs. in lacs
Net Sales excluding Excise Duty 21000
Increase in Stock of finished goods 250
Expenses :
Raw Materials consumed 2600
Packing materials consumed 1200
Stores and spares consumed 560
Power and fuel 4600
Repairs and maintenance 200
Insurance 120
Direct salaries and wages 480
Depreciation 885
Interest paid 1398
Factory overhead :
Salaries and wages 240
Others 250
Selling and distribution expenses :
Additional sales tax 457
Others 1700

Administration overheads :
Others 80
(June 2007)
Illustration 12: From the following figures extracted from the Cost Accounting Records of a company, calculate
the Value Addition and its ratio as percentage of sale and also show how the value added is distributed to the
different claimant thereto:
Particulars Amount (Rs. In Lakhs)
Gross Sale (included ED Rs.1,240 lakhs) 16,500
Raw materials 6,250
Increase in value of stock of finished goods 42
Salaries and wages 2,800
Power and fuels 2,220
Other overheads (Excluding Depreciation) 215
Depreciation 900
Interest 760
Dividend income from Investment 75
Provision for taxation 220
Dividend proposed 300
(June 2009)
Illustration 13: The following figures have been taken from the accounts of XYZ Ltd. (Rs. In Lakhs)
Particulars 31.3.2007 31.3.2006 31.3.2005
Gross Fixed Assets 4,615 4,212 3,845
Cumulative Depreciation 1,312 1,263 1,224
Capital Work In Progress 273 225 317
Investments in shares & debentures 724 712 693
Inventories 625 580 511
Sundry Debtors 334 317 292
Advances for purchase of capital equipments 24 61 47
Other loans and advances 65 58 53
Other current assets 32 29 26
Sundry creditors 214 187 174
Provisions for expenses 29 34 28
Net Sales 3,924 3,212 2,931
Depreciation 54 57 44
Interest 614 497 416
Profit before taxes 232 145 197
Compute the following ratios:
i) Profit as a % of capital
ii) Profit as a % of sales (December 2010)
Illustration 14: The following figures are extracted from the accounts of IRVENA Ltd., a single product
manufacturing company:
Year ended 31st March 2012 2011 2010
(Amount in Rs. Lakhs)
Gross Sales including excise duty 2856 2779 2625

Year ended 31st March 2012 2011 2010

(Amount in Rs. Lakhs)
Excise Duty 413 392 371
Raw Material consumed 1596 1484 1365
Direct Wages 49 45 38
Stores and spares 8 7 5
Depreciation charges to production cost centres 22 21 18
Factory Overheads
Depreciation 3 3 3
Rates and taxes 1 1 1
Other Overheads 8 7 6
Administrative Overheads
Rates and taxes 3 3 3
Selling and distribution Overheads
Packing and forwarding 8 8 7
Depreciation 1 1 1
Interest 119 104 95
Bonus and Gratuity 17 14 13
Current Assets 1176 1014 896
Current Liabilities and Provisions 454 427 344
You are required to compute the following ratios as per requirements of the Annexure of the Rules, 2014:
a) Profit before tax (PBT) to Value Added
b) Value Added to Net Sales
c) Profit Before Tax (PBT) to Net Sales (December 2012)
Illustration 15: XYZ Ltd. has furnished the following information from the financial books for the year ended
31st March 2009:
Profit & Loss A/c
Rs. Rs.
To Opening Stock 70,000 By Sales (10250 units) 28,70,000
(500 units at Rs.140 each) By Closing Stock
To Materials consumed 10,40,000 (250 units at Rs.200 each) 50,000
To wages 6,00,000
To Gross Profit C/d 12,10,000
29,20,000 29,20,000
To factory overhead 3,79,000 By Gross Profit B/d 12,10,000
To Administrations overhead 4,24,000 By Interest 5,000
To Selling Expenses 2,20,000 By Rent 36,000
To Bad Debts 6,000
To Preliminary Exp. 30,000
To Net Profit 1,92,000
12,51,000 12,51,000

The Cost Sheet shows the cost of materials at Rs. 104 per unit and the labour cost at Rs. 60/- per unit. The factory
overheads are absorbed at 60% of labour cost and administration overheads are 20% of factory cost. Selling
Expenses are charged at Rs. 24 per unit. The Opening Stock of finished goods is valued at Rs.180 per unit.
You are required to prepare:
(i) A statement showing profit as per cost A/c for the year ended 31.03.2009.
(ii) A statement showing the reconciliation of profit as disclosed in cost A/c and the profit shown in financial
A/c.
(June 2009)
Illustration 16: The profit as per financial accounts of XY Cement Ltd, for the year 2010-11 was Rs. 1,34,27,561.
The profit as per Cost accounting records for the same period was more. You are required to prepare a
reconciliation statement and arrive at the profit as per cost accounts. The following details are collected from the
financial accounting schedules and cost accounting records.
Particulars Financial Accounts Cost Accounts

Value of Stock
- Opening WIP 29,52,315 23,45,720
- Opening FG 2,48,37,410 2,72,16,930
- Closing WIP 41,72,635 36,36,345
- Closing FG 3,67,51,400 4,15,24,148
Interest income from inter-corporate deposits 6,14,250 -
Donations given 4,75,250 -
Loss on sale of fixed assets 1,04,148 -
Value of cement taken for own consumption 3,75,920 3,45,200
Cost of power drawn from own wind-mill:
- At EB Tariff 48,58,415
- At cost 34,10,420
(June 2011)
Illustration 17: The profit as per financial accounts of Janardhan Cement Ltd, for the year 2011-12 was Rs.
1,54,28,642. The profit as per Cost accounting records for the same period was less. The following details are
collected from the financial accounting schedules and cost accounting records.
Particulars Financial Accounts Cost Accounts
Value of Stock
- Opening WIP 25,62,315 22,65,710
- Opening FG 2,65,47,520 2,92,18,950
- Closing WIP 42,75,640 37,36,346
- Closing FG 3,72,59,430 4,35,25,149
Interest income from inter-corporate deposits 6,15,340 -
Donations given 4,85,560 -
Loss on sale of fixed assets 1,22,546 -
Value of cement taken for own consumption 3,82,960 3,65,426
Cost of power drawn from own wind-mill:
- At EB Tariff
- At cost 49,56,325
36,20,370
Non-Operating Income 45,36,770 -
Voluntary Retirement Compensation 16,76,540 -

Insurance Claim relating to the previous year received 14,35,620 -

during the year
You are required to prepare a reconciliation statement and arrive at the profit as per cost accounts.
(June 2011 & December 2013)
Illustration 18: The Cost Accountant of SOVANA SUGAR MILLS LTD. has arrived at a profit of Rs. 73,24,150
based on Cost Accounting records for the year ended March 31, 2013. As Cost Auditor, you find the following
differences between the Financial Accounts and Cost Accounts:
(i) Decrease in value of Closing WIP and Finished goods inventory as per Financial Accounts Rs.
128,21,995 as per Cost Accounts Rs. 131,04,220
(ii) Profit on Sale of Fixed Assets Rs. 61,500
(iii) Loss on Sale of Investments Rs. 11,200
(iv) Voluntary Retirement Compensation included in Salary & Wages in F/A Rs. 16,75,000
(v) Donation Paid Rs. 25,000
(vi) Major Repairs & Maintenance written off in F/A Rs. 13,26,000 (Amount reckoned in Cost Accounts
of Rs. 6,08,420 for this job)
(vii) Insurance Claim relating to previous year received during the year Rs. 14,29,000
(viii) Profit from Retail trading activity Rs. 7,12,300
(ix) Interest Income from Inter-Corporate Deposits Rs. 6,15,000
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Financial Accounts.
(June 2013)
Illustration 19: A company has been in existence since 1990 and is covered under cost audit for the first time in
2014-15. Whether it is mandatory to indicate previous year figure while submitting the report?
Solution: A company coming under the purview of the Cost Audit for the first time, the cost auditor shall mention
figures for the previous year(s) certifying by means of a note that the figures so stated are on the basis of
information furnished by the management, for which he has obtained a certificate from them.
Illustration 20: The manufacturing process of a company generates Steel Scrap during production of its main
products which may or may not be covered under cost audit. Such scrap is cleared under Chapter 72 of the Central
Excise Tariff and sold in the market. Will the company be covered under cost audit for generation of scrap?
Solution: The generation of steel scrap is not a production or processing or manufacturing but is incidental to
manufacture of its main products. Even though steel scrap, when sold, is liable for payment of excise duty under
Chapter 72, still, generation of scrap will not be covered under cost audit.
Illustration 21: In dealing with the financial position of a company in line with the new Companies (Cost Records
and Audit) Rules, 2014, state your opinion regarding:
(i) Should investments like National Savings Certificates deposited with Govt. Authorities like Sales tax
authorities etc. as securities be treated as investment outside the Business?
(ii) Is the Capital employed to be computed as at the beginning of the year or at the end of the year or
average of both?
(iii) In case the financial accounts of the company are yet to be finalised and audited, how should the cost
auditor provide the financial data required under the new Companies (Cost Records and Audit) Rules,
2014? (Final June 2014)
Solution:
(i) Such investments in normal course of business and for the purpose of business. Therefore, they cannot
be treated as investment outside the business.

(ii) Capital employed has been defined in the Rules as average of net fixed assets plus net current assets
existing beginning and close of the financial year.
(iii) Where the financial accounts of the company are yet to be finalized at the time of submission of the
Cost audit Report, cost auditor may indicate in his report all financial data on the basis of the unaudited
or provisional accounts. This is necessary as all cost statements contain a lot of data which have a
linkage with to the financial accounts. After the accounts have been finalized, a supplementary cost
audit report should be submitted as soon as the audited accounts are made available.
Illustration 22: Following data of B. K. Ltd. is available relating to the Cost of Production of a product
subjected to Cost Audit. Prepare the Export Profitability Statement to be included in the Annexure to the Cost
of Production of 12,000 units:
Particulars Amount (In Rs.)
Sales 2,50,000
Sales (Export) 2,000 units @ Rs.21 42,000
Materials Consumed 25 tonnes @ Rs.6 1,50,000
Imported Components 12,000 units @ Rs.3 36,000
Direct Labour 12,000
Factory Overhead 17,000
Administrative Overhead 6,000
Freight and Packing (Local Sales) 5,000
Packing for Export 2,500
Handling at Port 600
Opening Work–in–Progress 12,000
Closing Work–in–Progress 6,000
(1) Export incentive of 12% on FOB is receivables.
(2) Drawback on duty paid on Raw Materials and components available on Export is Rs. 3,000.
Illustration 23: Following data is available for as company relating to the Cost of Production of a product
subjected to Cost Audit. Prepare the Export Profitability Statement to be included in the Annexure to the Cost of
Production of 10,000 units:
Sales (Local) 9,000 units 2,02,500
Sales (Export) 1,000 units 20,000
Materials Consumed 20 tonnes @ Rs.5 100,000
Imported Components @ Rs.3 / unit 30,000
Freight and Packing (Local Sales) 4,500
Packing for Export 2,000
Handling at Port 500
(2) Drawback on duty paid on Raw Materials and components available on Export is
Rs. 2,500. (June 2006)

Illustration 24: Following data is available for Nelson Ltd. relating to the Cost of Production of a product
subjected to Cost Audit. Prepare the Export Profitability Statement to be included in the Annexure to the Cost of
Production of 23,000 units:
Sales (Local) 15,000 units 40,50,000
Sales (Export) 8,000 units 20,00,000
Materials Consumed 120 tonnes @ Rs. 240 per tonne 28,800
Imported Components @ Rs. 175 / unit 40,25,000
Freight and Packing (Local Sales) 4,65,000
Packing for Export 3,60,000
Handling at Port 120,000
(2) Drawback on duty paid on Raw Materials and components available on Export is
Rs. 25,000. (December 2014)
Illustration 25: A chemical manufacturing unit uses ingredient ‘Q’ as the basic material. The cost of the material
is Rs. 20 per kg and the Input-Output ratio is 120%. Due to a sudden shortage in the market the material becomes
non-available and the unit is considering the use of one of the following substitutes available:
Materials Input - Output Ratio Rs./ per Kg

B1 135% 26
B2 115% 30
You are required to recommend which of the above substitutes is to be used.
Illustration 26: The following figures are extracted from the Accounts of SINJINI LTD., a single product
Manufacturing Company:
BALANCE SHEET AS AT MARCH 31
Particulars 2014 2013 2012
(Amount in Rs. lakhs)
LIABILITIES:
Share Capital 1,500 1,000 1,000
Reserves and Surplus 2,180 1,625 1,220
Secured Loans:
Term Loans 1,540 825 750
Debentures 800 800 800
Unsecured Loans: 600 750 700
Current Liabilities & Provisions:
Current Liabilities 1,330 626 860
Provisions 400 300 250
TOTAL 8,350 5,926 5,580
ASSETS:
Fixed Assets:
Gross Block 4,255 3,824 3,520
Less: Depreciation 2,222 1,920 1,720

2,033 1,904 1,800

Capital Work-in-Progress 852
Net Block 2,885 1,904 1,800
Investments in Subsidiaries 400 200 200
Current Assets, Loans & Advances:
Inventories 2,015 1,245 1,160
Sundry Debtors 2,405 1,650 1,520
Cash and Bank Balances 305 202 380
Loans & Advances 340 725 520
TOTAL 8,350 5,926 5,580
Profit and Loss Account for the year ended March 31, 2014
Particulars 2014 2013
INCOME:
Sales (including Excise duty) 14,520 12,255
EXPENDITURE:
Material Consumed 5,670 4,504
Excise duty on despatches 3,345 3,426
Employee Costs 825 690
Other Manufacturing expenses 550 480
Selling and distribution expenses 1,551 1,401
Administration expenses 250 230
Interest on:
Term Loans 346 201
Debentures 120 120
Others 80 100
Depreciation 302 200
Difference in stock 826 268
13865 11620
Profit Before Taxation (PBT) 655 635
Provisions for Taxation 100 230
Profit After Taxation (PAT) 555 405
Transferred to Balance Sheet
You are required to compute the following figures/ratios as stipulated in PARA-4C of Part-D of the Annexure to
Cost Audit Report under Companies (Cost Record and Audit) Rules 2014 for the year ended March 31, 2013 and
2014.
(i) Capital Employed
(ii) Net Worth
(iii) Net Sales
(iv) PBT to Capital Employed
(v) PBT to Net Worth
(vi) PBT to Net Sales
(vii) Current Assets to Current liabilities
(viii) Debt-Equity Ratio (June 2014)
Illustration 27: SHRIZONI LTD., a single product manufacturing company, has following four operations
undergone by a product under Cost Audit.
The Process wise Input, Output, Direct Employee Costs and Direct Material Costs for the year ended March 31,
2014 are given below:

Process Input Unit Output Unit Direct Employee Direct Material

Cost of the process (Rs.) Cost of the process (Rs.)
AM 62,400 56,160 1,68,480 2,24,640
BN 66,000 59,500 2,38,000 2,67,750
CP 82,800 79,500 3,97,500 3,37,875
DQ 78,000 72,200 5,77,600 4,76,520
You are required to calculate:
(i) Direct Employee Cost per unit of the product.
(ii) Direct Material Cost per unit of the product (June 2014)
Illustration 28: The following figures are extracted from the Cost Accounting records of ADRIJA LTD., a single
product manufacturing company:
Year ended 31st March 2013 2012
Gross Sales including Excise duty: 2,600 2,080
Excise duty 200 160
Other Income 150 100
Increase in Value of stock of Finished Goods 10 5
Raw materials Consumed 880 720
Direct wages, Salaries, Bonus, Gratuity etc. 220 176
Power & Fuel 120 96
Stores and Spares 80 70
Cess and local Taxes 60 50
Other manufacturing Overheads 215 185
Administrative Overheads:
Audit fees 18 15
Salaries & Commission to Directors 24 20
Other Overheads 130 110
Selling and Distribution Overheads:
Salaries & Wages 18 15
Packing and forwarding 10 8
Other overheads 125 100
Total Depreciation 60 60
Interest Charges:
On Working Capital Loans from Bank 30 25
On Fixed Loans from IDBI 45 35
On Debentures 15 15
Provision for Taxes 158 100
Proposed Dividends 210 115
You are required to calculate the following parameters as stipulated PART-D, PARA-4(C) of the Annexure to Cost
Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for the year ended March 31, 2013 and
2012:
(i) Value Addition
(ii) Earnings available for Distribution
(iii) Distribution of Earnings to the different claimants.
(December 2013, Similar December 2015, Similar December 2016)
Illustration 29: The following figures are extracted from the Financial Accounts of SIMON LTD. for the year
ended March 31, 2013.
Particulars (Rs.) (Rs.)

Sales (20,000 units) 50,00,000

Materials 20,00,000
Wages 10,00,000
Factory Overheads 9,00,000
Administrative Overheads 5,20,000
Selling and Distribution Overheads 3,60,000
Finished Goods (1230 units) (closing) 3,00,000
Work - in - Progress :
Materials 60,000
Labour 40,000
Factory overheads 40,000 1,40,000
Goodwill written off 4,00,000
Interest paid on Capital 40,000
In the Costing records, Factory overheads is charged at 100% of Wages, Administrative overheads 10% of Factory
Cost and Selling and Distribution overheads at the rate of Rs. 20 per unit sold.
Prepare a Statement Reconciling the Profit as per Cost Records with the Profit as per Financial Records.
(December 2013)
Illustration 30: TUR Ltd. has two divisions. Division – I is involved in manufacturing of Railway and tramway
locomotives; Division – II is involved in providing after sale service to their customer. His aggregate annual
turnover from manufacturing division is Rs. 70 acres and annual receipts from service division is Rs. 35 crores.
State whether Companies (Cost Records and Audit) Rules, 2014 is applicable to the company?
Solution: As per Rule 3 of Companies (Cost Records and Audit) Rules, 2014, the class of companies including
foreign companies, engaged in the production of the goods or providing services, specified in the Table, having an
overall turnover from all its products and services of Rs. 35 crore or more during the immediately preceding
financial year, shall maintain cost records for such products or services in their books of account.
Cost Records: In the given case, the product is covered under item (B) as non-regulated sector of rule 3. The
overall turnover of the company is Rs. 105 crores (which is more than the stipulated limit of Rs. 35 crores). Hence
the company is required to maintain cost records, for the manufacturing division only, under Rule 3.
Cost Audit: The aggregate turnover of the individual product "Railway and Tramway Locomotives",
manufacturing by the company is not less than Rs. 35 crore and the overall turnover of the company is Rs. 105
crores. Hence, the company is also required to conduct cost audit.
Illustration 31: Whether the Companies (Cost Records, and Audit) Rules, 2014 is applicable to a company which
is classified as a micro enterprise or a small enterprise including as per the turnover criteria under section 7(9) of
the Micro, Small and Medium Enterprise Development Act, 2006?
Solution: The Companies (Cost Records and Audit) Rules, 2014 is not applicable to a company which is classified
as a ‘micro enterprise’ or a ‘small enterprises’ including as per the turn over criteria under section 7(9) of the
Micro, Small and Medium Enterprises Development Act, 2006.
Illustration 32: TWR Ltd, listed company, falling under non-regulated sectors as per rule 3 of Companies (Cost
Records and Audit) Rules, 2014, whose overall turnover in the immediately preceding financial year is Rs. 30
crore. Whether the company is required to maintain Cost records as per section 148(1) of the Companies Act,
2013. If yes, whether the company has also required to do cost audit of his accounts?
Solution: For the purposes of sub-section (1) of section 148 of the Act, the class of companies, including-foreign
companies engaged in the production of the goods or providing services, specified in the Table of rule 3, having
an overall turnover from all its products and services of Rs. 35 crore or more during the immediately preceding
financial year, shall maintain cost records for such products or services in their books of account. The requirement
to maintain the Cost Record is based on overall Turnover of the Company. It is immaterial whether the company
is listed or not. Hence, the TWR Lid. is not required to maintain the cost audit records because the overall turnover
of the company is less than Rs. 35 crore, and thus the question of getting cost audit done doesn’t arise.
Illustration 33: Whether all petroleum products are covered under Companies (Cost Records and Audit) Rules,
2014?
Solution: Yes, The Companies (Cost Records and Audit) Rules, 2014 is applicable to all Petroleum products
regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory
Board Act, 2006 (19 of 2006) and covered under CETA Heading no. 2709 to 2715.
Illustration 34: XYZ Ltd. is a manufacturer of Steel since 1st December, 2012. The aggregate turnover of the
product during the immediately preceding financial year is Rs. 30 Crore. During the current financial year 2014-
15 his turnover is Rs. 120 crore. You as a Cost Accountant, suggest whether any Cost Records is required to be
maintained by XYZ Ltd. for the financial year 2014-15?
Solution: Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 is applicable to the class of companies,
including foreign companies defined in clause (42) of section 2 of the Act, engaged in the production of the goods
or providing services as specified in the Table (regulatory or Non-regulatory sectors) of Rule 3, having an overall
turnover from all its products and services of Rs. 35 crore or more during the immediately preceding financial
year, shall include cost records for such products or services in their books of account.
XYZ Ltd is a manufacturer of steel which is covered under item of non-regulatory sector of rule 3 and aggregate
turnover during the immediately preceding financial year is less than Rs 35 crore. Hence XYZ Ltd is not liable to
maintain cost records during the financial year 2014-15.
However, XYZ Ltd. is required to maintain Cost Records and gets his accounts audited for the financial year 2015-
16 as per rule 3 & 4 of the Companies (Cost Records and Audit) Rules, 2014.
Illustration 35: What is the difference between Cost accounting policy and Cost Accounting system?
Solution: Cost Accounting Policy of a company should state the policy adopted by the company for treatment of
individual cost components in cost determination.
The Cost Accounting system of a company, on the other hand, would provide a flow of the cost accounting data /
information across the activity flow culminating in arriving at the cost of final product/ activity.
Illustration 36: A Tyre and Tube manufacturing company is having turnover of Rs. 80 crores from all its activities.
The company has filed its prospectus with SEBI for a public issue of equity shares and it hopes to complete the
public offering by September 2014 end. Whether cost audit will become applicable to the company? If yes, then
from which financial year will cost audit become applicable?
Solution: As per the Companies (Cost Records and Audit) Rules, 2014, Cost Audit is applicable to the non-
regulated sectors if overall annual turnover of the company from all its products and services during the
immediately preceding financial year is Rs. 100 crore or more and the aggregate turnover of the individual product
or products or service or services for which cost records are required to be maintained under rule 3 is Rs. 35 crore
or more.
Conclusion:
(i) In this case, the company does not satisfy the first criteria of Rule 4 i.e. overall- annual turnover of the
company from all its products and services during the immediately preceding financial year is Rs. 100
crore or more. Hence, the company is not required to gets its cost records audited.

(ii) The company is in the process of listing on a stock exchange in India which will nowhere affect the
applicability of the Companies (Cost Records and Audit) Rules, 2014. Hence, the company is not
required to gets its cost records audited.
Illustration 37: P Ltd manufacturer of Rubber, Coffee & Tea is having turnover of Rs. 100 crore from all activities
during preceding financial year. All the three products are falling under the CETA heading as mentioned in rule 3
of Companies (Cost Records and Audit) Rules, 2014. The turnover of all the three products is equal. State whether
the company is liable to do Cost Audit or not?
Solution: The Company is required to maintain cost records as per rule 3 of Companies (Cost Records and Audit)
Rules, 2014. Further the company is also liable get cost audit done because as per Rule 4, both the condition need
to be satisfied for applicability of cost audit. Firstly, the overall annual turnover of the company from all its
products and services during the immediately preceding financial year is Rs. 100 crore or more and secondly, the
aggregate turnover of the individual product or products or services for which cost records are required to be
maintained under rule 3 is Rs. 35 crore or more.
Illustration 38: ERR Ltd. manufacturer of Rubber, Coffee & Tea is having turnover of Rs. 100 crore from all
activities during the preceding financial year. All the three products are falling under the CETA heading as
mentioned in Companies (Cost Records and Audit) Rules, 2014. The turnover of all the three products is Rs. 60
crore, Rs. 20 crore & Rs. 20 crore respectively. State whether the company is liable to get Cost Audit done or not?
Solution: Every company specified in item (B) of rule 3 shall get its cost records audited in accordance with rule
4, if the overall annual turnover of the company from all its products and services during the immediately preceding
financial year is Rs. 100 crore or more and the aggregate turnover of the individual product or products or service
or services for which cost records are required to be maintained under rule 3 is Rs. 35 crore or more.
In this case, the first condition of overall annual turnover of Rs. 100 crore is satisfied. Further the second condition
is also satisfied since the aggregate turnover of all the three products categorised in Item (B) of the Rules is also
crossing the threshold limit. So the Cost Audit is also required for all the three products.
Illustration 39: A company with multiple product range is having cost audit for some of its products. What would
be the applicability of cost audit on other products not covered under Companies (Cost Records and Audit) Rules,
2014?
Solution: As per rule 4 read with rule 3 of the Companies (Cost Records and Audit) Rules, 2014, cost audit is only
applicable to goods specified in List (A) & (B) i.e. cost audit is applicable to products covered under regulatory
and non -regulatory sector mentioned in rule 3.
Illustration 40: A Company is the manufacturer of five products namely A, B, G, D & E with the turnover of Rs.
60 crores. Out of these five products, product D & E are covered under rule 3 of the Companies (Cost Records and
audit) rules, 2014. State whether Cost Records should also be required to maintain for product A, B & C?
Solution: As per rule 3, the cost records shall be maintained by the company whose overall turnover from all its
products and service of Rs. 35 crores or more and only for those products which are listed in table of rule 3. So,
the company should not be required to maintain cost records for products A, B & C.
Illustration 41: Whether cost auditor of the company has to directly submit his Cost Audit Report to the Central
Government?
Solution: No. The report on the audit of cost records shall be submitted, by the cost accountant in practice to the
Board of Directors of the company. Then the company shall within 30 days from the date of receipt of a copy of
the cost audit report prepared in pursuance of a direction under, sub-section (2) furnish the Central Government
with such report along with full information and explanation on every reservation or qualification contained therein

Illustration 42: XYZ Ltd. started the business of manufacture and sales of Jute and Jute products on and from
1.6.2014. The product is exported to foreign countries. Total overall turnover of the company for the financial year
ended 2014 -15 is Rs. 200 crores. State whether the Companies (Cost Records and Audit) Rules, 2014 is applicable
to the company for the financial year 2014-15?
Solution: Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 state that the class of companies,
including foreign companies defined in clause (42) of section 2 of the Act engaged in the production of the goods
or providing services, specified in the Table, having an overall turnover from all its products and services of Rs.
35 crore or more during the immediately preceding financial year, shall include cost records for such products or
services in their books of account.
As the turnover of the preceding financial year is not there since FY 2014-15 is the first year of operation of the
Company, Companies (Cost Records and Audit) Rules, 2014 is not applicable to the company for the financial
year 2014-15.
Illustration 43: The maximum period prescribed for presenting Cost Audit Report is 180 days from date of close
of the financial year. If Financial Accounts of a company is not ready before the stipulated time period, how cost
audit report will be completed reconciled with the financial books of the company?
Solution: In case financial accounts are not ready or are yet to be adopted in the AGM, the cost auditor can submit
the report based on provisional accounts and submit a supplementary report of reconciliation in case there are
materials differences in the final adopted accounts.
Illustration 44: Is a cost auditor required to audit and certify monthly, quarterly, half-yearly and yearly cost
statements?
Solution: As per Rule 5, every company under these rules including all units and branches thereof are required, in
respect of each of its financial year, to maintain cost records in form CRA-1. The cost records are required to be
maintained on regular basis in such manner so as to facilitate calculation of per unit cost of production or cost of
operations, cost of sales and margin for each of its products and activities for every financial year on monthly or
quarterly or half-yearly or annual basis. The cost auditor is appointed to conduct audit of the cost records and make
report thereon for the financial year for which he is appointed. It is not incumbent upon the cost auditor to certify
monthly, quarterly, half-yearly cost statements.
Illustration 47: What is the procedure to be followed for fixing the remuneration of a cost auditor?
Solution: Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the procedure of appointment
and fixing the remuneration of a cost auditor. It states as follows:
Remuneration of the Cost Auditor: For the purpose of sub-section (3) of section 148,—
(a) in the case of companies which are required to constitute an audit committee—
(i) the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost accountants in
practice, as cost auditor on the recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall be considered and approved by the
Board of Directors and ratified subsequently by the shareholders;
(b) in the case of other companies which are not required to constitute an audit committee, the Board shall appoint
an individual who is a cost accountant in practice or a firm of cost accountants in practice as cost auditor and the
remuneration of such cost auditor shall be ratified by shareholders subsequently.
Illustration 48: Is there any obligation on the part of cost auditor to report offence of fraud being or has been
committed in the Company by its officers or employees?

Solution : As per sub-section (12) of section 143 of the Companies Act 2013, it is obligatory on the part of cost
auditor to report offence of fraud which is being or has been committed in the company by its officers or employees,
to the Central Government as per the prescribed procedure under the Rules.
As per the proviso to above sub-section, it has been stated that in case of a fraud involving lesser than the specified
amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in
other cases within such time and in such manner as may be prescribed.
Illustration 49: The CCRA Rules, 2014 provides exemption from cost audit to a company which is covered under
Rule 3, and whose revenue from exports, in foreign exchange, exceeds seventy five per cent of its total revenue.
How to determine the percentage to total revenue in the following cases:
(i) In a company who is manufacturing Pharmaceutical products, the revenue from export of pharmaceutical
products earned in foreign exchange divided by total revenue including other income etc. is 58%.
(ii) The revenue in foreign exchange earned from export of pharmaceutical products plus revenue in foreign
exchange earned from rendering of research & development service divided by total revenue including other
income etc.is 82%.
Solution: Cost audit is applicable for specified products/services. Rule 4(3) states “The requirement for cost audit
under these rules shall not apply to a company which is covered in rule 3, and (i) whose revenue from exports, in
foreign exchange, exceeds seventy five per cent of its total revenue”. The inclusion or coverage of a company
under Rule 3 is in respect of products/services listed under Table-A and Table-B and consequently the computation
of 75% is to be calculated for the specific products/ services covered under Rule 3 and not in respect of all the
products/services of the company.
The total revenue and turnover of R&D Activities, not being covered under Rule 3 cannot be taken into
consideration for computation of 75%.
Illustration 50: In the abridged cost statement, what are Industry specific operating expenses? When should this
be used?
Solution: Industry Specific operating expenses are those which are peculiar to a particular industry such as
Telecommunication Industry which shows expenses such as Network Operating cost, License fee, Radio Spectrum
charges, Microwave charges etc. which are peculiar to this Industry and should be disclosed separately in the cost
statement. The Industry Specific operating expenses will vary from industry to industry depending upon the nature
of operations. The industry specific operating expenses shall have to be identified and reported upon in the abridged
cost statement.
Illustration 51: MEGLOW TECHNO LTD. is a manufacturer of Ball and Roller bearings. In the Company four
operations are carried on simultaneously in the manufacture of components. The input/output data and Direct
Wages Cost relating to the year 2014-15 for one component are as follows:
Operations Gross Scrap Direct

Input (Tonnes) Wages
(Tonnes) (Rs.)
PM 48000 8000 12,40,000
QN 50000 10000 12,50,000
RA 72000 12000 23,60,000
SB 55000 5000 32,70,000
Material is introduced at start of Operation PM at a cost of Rs. 6,000 per tonne. Scrap can be sold at Rs. 500 per
tonne. Overheads are absorbed at 150% on Direct Wages. You are appointed as a cost consultant of Meglow

Techno Ltd. The company has not maintained cost records so far and seeks your advice in the matter. Show your
computation of the total cost per tonne of finished component so that the company can adopt the same in future.
(Final June 2015)
Illustration 52: The profit as per Cost Accounts of RUKMANI SUGAR MILLS LTD for the year ended March
31, 2015 was Rs. 1,30,46,200. In the course of Cost Audit, you come across the following differences between
the Financial Accounts and Cost Accounts.
a) Element of Profit on self-consumption of sugar included in Financial Accounts was Rs. 75,000.
b) A sum of Rs. 32 Lakhs has been paid during the year towards Additional Sales Tax for previous years
and included in current year Rates and Taxes.
c) Income (dividend) from investment booked in Financial Accounts was Rs. 2,90,000
d) Loss on Sale of investments — Rs. 6,000
e) Profit on Sales of fixed Assets accounted in F/A was Rs. 6,25,000.
f) A sum of Rs. 15,00,000 had been written off in the financial A/c as new Project development expenses.
g) Major consumables written off in full in the Financial A/cs be treated as deferred revenue expenditure
amortized over three years in the Cost Accounts full value of Rs. 24,00,000.
h) Insurance claim relating to previous years received during the year Rs. 54,00,000.
i) Loss from trading Activity Rs. 11,20,000.
j) Voluntary Retirement Compensation included in Salary & Wages in F/A— 26,50,000.
k) Increase in value of work in-progress and finished goods inventory was as follows:
As per Financial Accounts Rs. 18,30,000
As per Cost Accounts Rs. 16,15,000
You are required to prepare a reconciliation statement between Profit figures as per Cost and Financial Accounts
and Also show the Profit as per Financial Accounts for the year ended March 31, 2015. (June 2015)
Illustration 53: A paper manufacturing company having turnover of Rs. 90 crore, in the year 2016-17 was
incorporated in 2015-16 and commenced its production from March, 2016. From which financial year, the Cost
Audit will be applicable? (June 2017)
Solution: Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that every company, engaged in
the production of goods or providing services specified in the Rules, shall maintain Cost Records if the overall
turnover from all its product and services is Rs. 35 crore or more during the immediately preceding financial year.
Applicability for Cost audit [Rule 4]
(1) Every company specified in item (A) of Rule 3 [Regulated Sector] shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from all its products and services
during the immediately preceding financial year is rupees fifty crore or more and the aggregate turnover of
the individual product or products or service or services for which cost records are required to be maintained
under rule 3 is rupees twenty five crore or more.
(2) Every company specified in item (B) of Rule 3 [Non –regulated Sector] shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from all its products and services
during the immediately preceding financial year is rupees one hundred crore or more and the aggregate
turnover of the individual product or products or service or services for which cost records are required to be
maintained under rule 3 is rupees thirty five crore or more.
In the present case, the Paper Industry falls under the Non-Regulated Sector and is required to maintain cost records
from the Financial Year 2017-18 but is not required to get its cost records audited from the same year since it did
not cross the threshold limit in the preceding financial year 2016-17.
Illustration 54: Mr. R. Kulkarni was appointed as Cost Auditor of MNC Ltd. for the Financial Year 2016-
17. State
a) How long the Cost Auditor can continue to hold office for the financial year?
b) In what format the Cost Auditor shall submit his/her Report?

c) What was the formality to be observed by the Board of Directors if the cost Auditor did resign on
31.01.2017? (June 2017)
Solution: (a) Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014, states that every Cost Auditor
appointed by the Company shall continue in such capacity till the expiry of 180 days from the closure of the
financial year or till he/she submits the Cost Audit Report for the financial year for which he /she has been
appointed.
(b) According to Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014 every cost auditor, who
conducts an audit of the cost records of a company, shall submit the cost audit report along with his/her/its
reservations or qualifications or observations or suggestions, if any, in form CRA-3.
(c) As per Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014, any casual vacancy in the
office of the Cost Auditor, by resignation or otherwise, shall be filled by the Board of Directors within 30 days of
occurrence of such vacancy. The procedure followed for such appointment shall be the same as that of fresh
appointment. The company shall inform the Central Government in Form CRA 2 within 30 days of such
appointment of Cost Auditor.
Illustration 55: What are the duties of the companies in relation to provisions of section 148 of the Companies
Act 2013 and Rules framed thereunder? (December 2015)
Solution: Every company required to get cost audit conducted under section 148 (2) of the Companies Act, 2013
shall:-
(a) Appoint a cost auditor within 180 days of the commencement of every financial year,
(b) Inform the cost auditor concerned of his or its appointment,
(c) File a notice of such appointment with the Central Government within a period of thirty days of the Board
meeting in which such appointment is made or within a period of one hundred and eighty days of the
commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along
with the applicable fee;
Within a period of thirty days from the date of receipt of a copy of the cost audit Report, the management of the
Company should furnish the Central Govt. with such report along with full information and explanation on every
reservation or qualification contained therein, in form CRA-4 along with fees specified in Companies (Registration
offices and Fees) Rules, 2014
Illustration 56: Is maintenance of Cost Accounting Records mandatory for a multi-product company where all
the products are not covered under the Rules, even if the turnover of the individual products, which are covered
under the Rules, is less than rupees thirty five crore? (December 2017)
Solution: The Rules provide threshold limits for the company as a whole irrespective of whether all it’s products
are as per the prescribed industry /sector provided under Table A or Table B. The Rules do not provide any
minimum product specific threshold limits for maintenance of Cost Accounting Records and consequently the
company would be required to maintain Cost Accounting Records for the products covered under table A or Table
B or both , even if the turnover of such products is below rupees thirty five crore.
Illustration 587: From the following information, find the Economic Value Added (EVA) of a company for the
previous year 2016-17:
Particulars Amount (Rs. ‘000)

Value added as per the Annexure to the Cost Audit Report-Part D 30,00,000
Distribution of Earning to Wages 12,50,000

Interest 3,30,000
Dividend @ 12% 3,60,000
Taxes 3,50,000
Capital Employed (as in the Cost Audit Report) 65,00,000
The Dividend at 12% of paid up capital is normal as per the market norms for the industry. Taxes and all expenses
are considered on cash basis. (December 2017)
Illustration 58: The Board of Directors of XYZ Ltd. appointed M/s. Luthra & Co., Cost Accountants, as Cost
Auditor of the company for the Financial Year 2017-18. On receipt of the appointment letter, what statement or
declaration needs to be submitted by the Auditor to the company? (December 2017)
Solution: As per rule 6 sub-rule (1) of the Companies (Cost Records and Audit) Rules 2014, the cost Auditor on
receipt of offer of appointment shall furnish a written consent to such appointment, and a certificate as provided
in Sub-rule (1A) .The Cost Auditor appointed under Sub-Rule (1) shall submit a certificate that
a) The individual or the firm as the case may be is eligible for appointment and is not disqualified for
appointment under the Companies Act 2013, the Cost and Works Accountant act, 1959 and the rules or
regulations made there under
b) The Individual or the firm , as the case may be satisfies the criteria provided in section 141 of the Act ,so
far as may be applicable
c) The proposed appointment is within the limits laid down by or under the authority of the act; and
d) The list of proceedings against the Cost Auditor or the audit firm or any partner of the audit firm pending
with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
Illustration 59: Whether companies registered under Section 8 of the Companies Act, 2013 (Non-profit Orgn.)
and One-Person Company (OPC) introduced in the Companies Act, 2013 are covered under the Rules?
(December 2017)
Solution: The Companies (Cost Records and Audit) Rules, 2014 are applicable to every company registered under
the Companies Act, 2013 which are engaged in production of goods or provision of services listed in Table-A or
Table-B of Rule 3. Different threshold limits have been prescribed in the Rules for applicability of maintenance of
Cost Accounting Records and coverage under Cost Audit.
Exemption has been granted only to the companies which are classified as a micro enterprise or a small enterprise,
including as per the turnover criteria under Sub-section (9) of section 7 of the Micro, Small and Medium Enterprise
Development Act, 2006 and the foreign companies having only liaison offices engaged in Production, import and
supply or trading of medical devices specified under Item 33 of Table-B of Rule 3. Any other legal entity, registered
as a company that meets the conditions stated in Rule 3 and Rule 4 are covered.
Illustration 60: What are the areas the Cost Accounting Policy of a company will cover in the Cost Audit Report?
(December 2017)
Solution: Annexure Part A-3 to the Cost Audit Report as per the Companies (Cost Records and Audit) Rules 2014,
describe the Cost Accounting Policy of the Company. The Policy shall cover the following points:
a) Identification of Cost centres, Cost objects and Cost drivers
b) Accounting for materials costs including packing materials, stores and spares, employee cost, utilities and
other relevant cost components
c) Accounting, allocation and absorption of Overheads

d) Accounting for depreciation/amortization

e) Accounting for by-products/joint -products or services, scraps, wastage , etc
f) Basis for inventory valuation
g) Methodology for valuation of inter-Unit/inter-Company and Related Party Transactions
h) Treatment of abnormal and non-recurring costs including classification of other non-cost Items.
i) Other relevant Cost Accounting Policy adopted by the Company.
Illustration 61: Ambica Textile Mills produced cloth and fabrics. In addition, they undertook customer's job order
for processing of cloth towards optimum utilisation of its spare capacity and earned from loan licence. From the
following Income figures, find out the turnover of the company as per the Companies (Cost Records and Audit)
Rules:
Income (Rs. in lakh)

Sales (include Excise Duty 1200) 20,500
Trading Sales from Depots 1,250
Export Income 2,100
Export Duty 450
Income from Job Processing 1,100
Scrap Sale 235
Income from Loan Licence operations 560
(December 2017)
Illustration 62: The financial profit and loss account for the year 2016-17 of a company shows a net profit of
Rs.29,60,000. During the course of Cost Audit, it was noticed that:
(i) The company was engaged in trading activity by purchasing goods at Rs. 6,00,000 and selling it for Rs.
7,50,000 after incurring repacking cost of Rs. 25,000,
(ii) Some discarded assets sold off with no scrap value for Rs. 90,000,
(iii) Some renovation of machinery was carried out at a cost of Rs. 6,00,000, having a productive life of
five years, but entire amount was charged to financial accounts,
(iv) Interest was received amounting to Rs. 1,40,000 from outside investments,
(v) Voluntary Retirement payment of Rs.3,50,000 was not included in the Cost Accounts,
(vi) Insurance claim of previous year was received to the extent of Rs. 2,50,000 but was not considered in
the Cost Accounts,
(vii) Opening stock or raw materials and finished goods was overvalued by Rs. 2,40,000 and closing stock
of finished goods was overvalued by Rs.1,10,000 in the financial accounts, and
(viii) Donation of Rs.80,000 towards CSR commitment was not considered in the Cost Accounts.
Work out the profit as per the Cost Accounts and briefly explain the adjustment, if any, carried out.
(December 2017)
Illustration 63: The financial position of Hind Automobiles Ltd. for the years 2016-17 and 2015-16 are given
below. From the figures, find (i) Capital Employed, (ii) Debt-Equity Ratio, (iii) Proprietory Ratio, and (iv) Current
Ratio.
(Amount Rs. In ‘000)
Liabilities 31.03.2017 31.03.2016 Assets 31.03.2017 31.03.2016
Capital (Equity) 600 600 Fixed Assets 2400 1800
General Reserves 414 326 Less: Depreciation 840 600
Revaluation Reserve 110 125 Net Fixed Assets 1560 1200
Profit/Loss A/c Balance 122 54 Stock 720 600
Loan-Secured 385 467 Sundry Debtors 410 300
Loan-Unsecured 655 128 Cash & Bank Balances 180 120
Sundry Creditors 560 480 Other current asset 40 30

Provision of tax 64 70
Total 2910 2250 Total 2910 2250
(June 2017)
Illustration 64: A Company meets the threshold limits for both maintenance of Cost Records and Cost Audit in
2015-16 and, consequently, comes under the purview of the Rules in the year 2016-17. If the turnover of the
company gets reduced to lower than the prescribed threshold limit in 2016-17, state whether the Rules relating to
Cost Records and Cost Audit will be applicable for the year 2017-18? (June 2018)
Solution: Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that a company engaged in the
production of the goods and/or rendering of the services as prescribed, having an overall turnover from all its
products and/or services of Rupees thirty five crore or more during the immediately preceding financial year, shall
include cost records for such products and/or services in their books of account. Since the threshold limit for
applicability of maintenance of Cost Accounting Records is met in 2015-16 (Previous Year), the Cost Records are
required to be maintained from 2016-17. Once the maintenance of Cost Records becomes applicable, it would be
maintained on a continuous basis in the subsequent years also. Following the same line, Cost Audit will be
applicable from 2016-17 and for every year thereafter. So Cost Audit is applicable in 2017-2018 also.

Practice Questions
Question 1: Autoparts Manufacturing Company Ltd. showed a profit for the year 2016-17 as Rs. 35,46,700. During
the course of Cost Audit, the followings transactions were noticed:
(i) an old machine with net value of Rs. 6,54,000 was sold off for Rs. 9,30,000,
(ii) dividend income was received amounting to Rs. 84,500 from investments,
(iii) a sum of Rs. 58,000 was spent towards CSR commitment,
(iv) the company was engaged in trading activity where purchase of goods was Rs. 13,50,000 and
sales was Rs. 13,42,300, after incurring Rs. 40,800 as expenditure,
(v) some renovation work was carried out at a cost of Rs. 7,75,000 and its useful life was only for
five years, and
(vi) the closing inventory of raw material was undervalued Rs. 29,600 and that of finished goods
was overvalued Rs. 65,400 in the financial records.
Work out the Profit as per the Cost Accounts.
Solution: Reconciliation of the Cost Accounts and the Financial Accounts of Auto parts Manufacturing Company
Ltd.
Profit as per the Financial Accounts 35,46,700

Add: Trading Loss 48,500
Add: 4/5th of Renovation Expenses Amortized 6,20,000
Add: CSR Contribution 58,000 726,500
Less: Profit on Sale of Assets 2,76,000
Less: Income from Investments 84,500
Less: Effect of Undervaluation/Overvaluation of closing Inventory 35,800 3,96,300
Profit as per the Cost Accounts 38,76,900
Illustration 2: The financial profit and loss account for the year 2015-16 of a company shows a net profit of
Rs.26,28,000. During the course of cost audit, it was noticed that:
(i) The company was engaged in trading activity by purchasing goods at Rs. 4,00,000 and selling it for
Rs. 5,00,000 after incurring and expenditure of Rs. 25,000.
(ii) Some old assets sold off at the year-end fetching a profit of Rs. 80,000
(iii) A major overhaul of machinery was carried out at a cost of Rs.4,00,000. And the next such overhaul
will be done only after four years.
(iv) Interest was received amounting to Rs.1,50,000 from outside investments.
(v) Work-in-progress valuation for financial accounts does not as a practice take into account factory
overhead. Factory overhead was Rs. 1,85,000 in opening WIP and Rs. 3,15,000 in closing WIP.
Work out the profit as per Cost Accounts and briefly explain the adjustment, if any, carried out.
Solution: Reconciliation Statement
Profit as per Cost Accounts 27,53,000

Less: 1. Proportionate Charge i.e., three-fourth for overhaul of machinery
not provided in cost accounts 3,00,000
2. Difference in the valuation of work-in-progress 1,30,000 4,30,000
Add: 1. Trading profit not included in cost accounts 75,000

2. Profit on sale of old assets 80,000
3. Interest received on outside investment 1,50,000 3,05,000
Profit as per Financial Profit & Loss Account 26,28,000

Cost Auditor - Professional Ethics and Responsibilities
As professionals in the field of Cost and Management Accounting, the members of our Institute are bound by
a code of professional ethics. This code prescribes and binds the members to the highest level of care, due
diligence and responsibility to their clients and employers, the public and their fellow professionals.
The objective of this code is to instill the following virtues amongst the members –
a) Integrity - be straightforward and honest;

b) Competence – not to perform any service which he is not competent (he either lacks skill / diligence /
knowledge) to carry out;
c) Confidentiality - not disclose information acquired during the course of his engagement;
d) Objectivity - be fair and should not allow prejudice or bias; and
e) Professional behavior - act in a manner consistent with the good reputation of the profession
I C COP
The Institute of Cost Accountants of India has been given powers under the First and Second Schedule of The
Cost And Works Accountants Act, 1959 (‘CWA Act’) to regulate the profession and to initiate any enquiry
into cases where it is of the opinion that a member is guilty of professional or other misconduct.
As per the Act, the expression “professional or other misconduct” shall include any act of – a) commission
or b) omission provided in any of the Schedules.
The contents of the Schedules of the CWA Act are briefly discussed as under [Please note that these
schedules have been omitted in the revised study material of the Institute (issued in January 2019), however
still it is recommended to study these thoroughly, from an exam standpoint]:-
Schedule Particulars
First Schedule Professional misconduct in relation to cost accountants in practice. E.g. A practicing cost
- Part I accountant should not:
- allow any person to practice in his name, other than his CMA partners
- pay any share, commission or brokerage (directly or indirectly) in the fees or profits
of his professional work, to any person other than his partners
- accepts or agrees to accept any part profits of professional work of a person who is
not a member of the institute
- enters into partnership with any person, other than a cost accountant in practice
- secures professional business from a) any person other than his partner or employees
or b) from any source which is not open to cost accountants
- solicit clients or professional work, by circular, advertisement, personal
communication or interview or by any other means. However, soliciting professional
work from - a) another cost accountant in practice and b) through bidding in a tender

for professional services etc. will not tantamount to professional misconduct
- advertise his professional attainments or services, or uses any designation or
expressions other than cost accountant on professional documents, visiting cards,
letter heads or sign boards, unless the other designations are recognized by the
Central Government
First Schedule Professional misconduct in relation to members of the institute in service. E.g. A member
- Part II in service should not:
- pay to any person any share in the emoluments of the employment undertaken by
him
- accept any part of fees, profit or gains from a lawyer, a cost accountant or broker
engaged by such company, firm or person or agent or customer of such company,
firm or person by way of commission or gratification
First Schedule Professional misconduct in relation to members of the institute generally. E.g. A
- Part III member, whether in practice or not, should not:
- act as a fellow of the Institute, if he is not a fellow of the Institute
- refrain from supplying information called for by the Institute, Council or any of its
Committees
- Supplies / gives information knowing it to be false, while soliciting work from other
cost accountants / responding to tenders / bids.
First Schedule Other misconduct in relation to members of the institute generally. E.g. A member, whether
- Part IV in practice or not, should not:-
- be held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term i.e. exceeding six months
- bring disrepute to the profession or the institute as a result of his action whether or
not related to his professional work
Second Professional misconduct in relation to cost accountants in practice. E.g. a cost accountant in
Schedule - practice should not:-
Part I - disclose confidential information acquired in the course of his professional
engagement to any other person
- certify a report of an examination of cost accounting, unless the examination of such
statements has been made by him or by his partner
- permits use of his name in connection with an estimate of cost or earnings which is
contingent upon future events, showcasing that he vouches for the accuracy of the
forecast
- express his opinion on cost or pricing statements of any business or enterprise in
which he, his firm or a partner in his firm has a substantial interest
- fail to report a material mis-statement known to him to appear in a cost or pricing
statement
- does not exercise due diligence, or demonstrate gross negligence in conduct of his
professional duties, like - a) failure to obtain sufficient information before
expressing his opinion, b) failure to invite attention to material departure from the
generally accepted costing principles etc.
Second Professional misconduct in relation to members of the institute generally. E.g. a member of
Schedule - the institute, whether in practice or not, should not:-
Part II - contravene any of the provisions of this Act or the regulations made there-under
- disclose confidential information acquired in the course of his professional
engagement to any other person
- furnishing incorrect information(s) to the Institute, Council or any of its Committees,
knowing them to be false
- defalcate or embezzle moneys received in his professional capacity
Second Other misconduct in relation to members of the institute generally. E.g. A member of the
Schedule - Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is

Part III held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term exceeding six months.
Escalation matrix
Professional and other

misconduct(s)
Related to Schedule II
Related to Schedule I
or both the schedules
Complaint referred to the Complaint referred to the

board of discipline disciplinary committee
Following actions may be taken by the Board: Following actions may be taken by the Committee:
a) reprimand the member a) reprimand the member
b) remove the name of member (for 3 months) b) remove the name of member (permanently)
c) fine upto a maximum of INR 100,000 c) fine upto a maximum of INR 500,000
Some other penalties enunciated in CWA Act.
Section Particulars
Section 21 Constitution of Disciplinary Directorate, Board of Discipline and Disciplinary committee of the
Institute
Section 24 Any person who,
a) not being a member of the Institute, represents that he is a member of the Institute; or
b) not being a member of the Institute, uses the designation cost accountant; or
c) being a member of the Institute, but not having a certificate of practice, represents that
he is in practice or practices as a cost accountant,
shall be punishable as under:-

- on first conviction - fine of upto INR 1000 rupees,
- on any subsequent conviction - imprisonment of upto to six months, or with fine upto
INR 5,000, or with both.
Section 25 (1) No person shall,-
(i) use a name or a common seal which is identical with the name or the common seal of the
Institute; or
(ii) award any degree, diploma or certificate of any qualification or competence in cost
accountancy similar to that of a member of the Institute; or

Section Particulars
(iii) seek to regulate in any manner whatsoever the profession of cost accountants.
(2) Any person contravening the provisions of sub-section (1) shall, be punishable as under:-
- on first conviction - fine of upto INR 1,000
- on any subsequent conviction - imprisonment of upto 6 months, or with fine upto INR
5,000, or with both.
Section 26 (1) No company (including an LLP which has a company as its partner), whether incorporated
in India or elsewhere, shall practice as cost accountants.
(2) Any contravention of the provisions of sub-section (1) shall be punishable as under:-
- on first conviction - fine of upto INR 1,000
- on any subsequent conviction – fine of upto INR 5,000.
Section 27 No person other than a member of the Institute shall sign any document on behalf of a cost
accountant in practice or a firm of such cost accountants in his or its professional capacity.
(2) Any person who contravenes the provisions of sub-section (1) shall, be punishable as under:-
- on first conviction - fine of INR 5,000 to INR 100,000,
- on subsequent conviction - imprisonment for upto one year or with a fine of INR
10,000 – INR 200,000 or with both.
Section 28 If the person committing an offence under this Act is a company, the company as well as every
person in charge of, and responsible to, the company for the conduct of its business at the time
of the commission of the offence shall be deemed to be guilty of the offence and shall be liable
to be proceeded against and punished accordingly.
Section 29 No person shall be prosecuted under this Act except on a complaint made by or under the order
of the Council or of the Central Government.
Relevant sections under the Companies Act, 2013 dealing with fraud and false statements
Section Particulars
Section 447 any person who is found to be guilty of fraud (fraud means concealment of any fact or abuse
of position committed by any person or any other person with the connivance in any manner,
with intent to deceive), shall be punishable as under:-
- imprisonment for 6 months to 10 years; and
- fine which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud
Section 448 if in any return, report, certificate, financial statement, prospectus, statement, any person
makes a statement,—
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material, he shall be liable under section
447
Illustration 1: Explain whether the following activities amount to professional misconduct or not:
(a) A Cost Accountant takes voluntary retirement from his employer and starts practice. He continues his
association with his previous employers as an advisor, on a monthly retainer. (December 2005 and 2017 &
June 2012)
(b) A practicing lawyer specializing in anti-dumping cases comes to an informal understanding with an
independent practicing Cost Accountant to assist him in preparing accounting statements to support his cases,
and agrees to share his fees on a percentage basis. (December 2005 & June 2002)

(c) A Cost Accountant gives a certificate of cost for a product manufactured by an SSI unit owned entirely by
his son. (December 2005 & 2008 and June 2012)
(d) A cost accountant gives a certificate of cost of production for attaching with a tender for a cost–plus
contract. He comes to know after signing the certificate that his client has won a case with a supplier on
account of which the client is entitled to get a refund of substantial portion of the purchase price of the raw
material. The certificate is not corrected. (December 2008)
(e) X is a shareholder, in PQ Ltd. holding 100 shares. The company’s paid up capital is Rs. 5 crores (50 lakhs
shares of Rs. 10 each). X accepts a certificate work from the company. (December 2008 & 2010)
(f) A Practising Cost Accountant brings disrepute to the profession, as a result of his action in his professional
work.
(g) A practising Cost Accountant, for his personal advantage, shares certain confidential information acquired
during the of his cost auditing. (December 2005)
(h) A firm of Cost Accountants undertake the Cost Audit of a company. The audit work is conducted by one
of the partners and two assistants. The report is however, signed by another partner. (December 2010)
(i) A practicing cost accountant accepts an assignment previously held by another cost accountant in practice,
after due communication with him in writing. (December 2005)
(j) A practicing member/firm maintains branch office in India – each under the separate charge of a member
of ICAI. (June 2008)
(k) Personal discussion / correspondences with prospective clients relating to achievement and capabilities of
the practicing cost accountant. (June 2008 & June 2012)
(l) Press publicity (not an advertisement) regarding appointment as an Auditor (June 2008)
(m) An advertising notifying changes in address / partnership (June 2008)
(n) Mr. S. Jain, a practicing Cost Accountant takes up job as a full time lecturer in XBL Management Institute
at Jamshedpur affiliated to Ranchi University. (December 2011)
(o) Mr. P Dhar, a practicing Cost accountant uses a visiting card in which he designated himself besides as
Cost Accountant, as “Tax Consultant”. (December 2011)
(p) Mr. P. Nadkarni, a Cost Accountant practicing in India enter into partnership with Mr. R. D. Hones, CMA,
USA. (December 2011)
(q) CMA ANUSUA, a Cost Accountant in practice published a book and gave her personal introduction as an
author. The details also mentioned her professional experiences and her association as partner with PKR and
Associates, a firm of Cost Accountants. (December 2012)
(r) M/s. R.K. Bhatia & Associates, a firm of Cost Accountants in practice, develops a website “bhatia.com”.
The color chosen for website was very bright yellow where the names of the partners of the firm along with
their various professional attainments and the major clients were to be displayed on the website. (Dec 2012)
(s) CMA D.R.RADHAKRISHNAN a Cost Accountant in practice takes up the appointment as Managing
Director of ANKRIT LTD., a public limited company. (December 2012)

(t) F. B. HORE & CO., a firm of Cost Accountants was appointed by a Company to evaluate the costs of the
various products manufactured by it for its information system. One of the partners of the firm was a Non-
Executive Director of the Company. (June 2013)
(u) Mr. Arun, a CMA, is working as Manager-Cost Accounts of PQR Ltd. He accepts 10% of profits from his
friend, Mr. Raju, a lawyer and a legal consultant for PQR Ltd. He is doing the job on retainership basis.
(June 2018)
(v) Mr. S, a CMA in Practice, certifies a cost and pricing statement of manufacturing of pipes for the supply
relating to a contract. The statement is prepared by Mr. T, who is not a CMA or an employee of Mr. S.
(June 2018)
Answer:
(a) A cost accountant in practice can rightly in his/her professional capacity advise their client, whether
against fees or not. The accountant under reference has disconnected himself with his/her previous employer
as an employee and acts only in an advisory capacity, which is a legitimate activity of a practising Cost
Accountant. It does not amount to professional misconduct.
(b) Although the practicing cost accountant can accept the assignment for preparing the necessary statements
for the antidumping cases for a specified fee, the sharing of total fees on a percentage basis between the
lawyer and cost accountant amounts to an informal partnership between them, which is prohibited. Therefore,
this practice falls under the definition of professional misconduct.
(c) The Second Schedule to the Cost and Works Accountants Act, 1959 stipulates that a Cost Accountant in
practice shall be deemed to be guilty of professional misconduct if he expresses his opinion on cost or pricing
statements of any business or enterprise in which he, his firm or a partner in his firm has a substantial interest,
unless he discloses the interest also in his report.
Strictly speaking, a cost accountant issuing a certificate for a unit in which he has no direct interest is in order
and there is no professional misconduct. However, as in this case the factory is owned by the cost
accountant’s son it would be prudent on the part of the accountant to desist from issuing such a certificate on
moral grounds.
(d) Although at the time of signing the certificate, the cost of materials was based on the accounts and
documents made available to the cost accountant, if he was aware of the pending litigation, he should have
qualified his report as such. Otherwise, it would amount to misconduct. On the other hand, if the cost
accountant was kept in dark about the litigation by the client, he should have issued a corrigendum to the
certificate immediately after he comes to know of the judgment.
(e) Since X does not have substantial interest in PQ ltd., his undertaking the certification work does not
amount to professional misconduct.
(f) Part IV of First schedule provides that a member of the Institute in practice shall be deemed to be guilty of
misconduct, if in the opinion of the Council, he brings disrepute to the profession as a result of his action –
relating to his professional work.
(g) Confidential information acquired as a result of professional relationship should not be used for the
personal advantage of the professional accountant. This will be treated as a professional misconduct.

(h) The first schedule provides that a cost accountant will be guilty of professional misconduct of he allows a
person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf.
Therefore, in the current case the cost accountant is not in default.
(i) There is no professional misconduct in accepting new engagements after communicating with the erstwhile
cost auditor. In the instant case auditor has accepted the engagement after communicating with the previous
auditor. Hence there is no misconduct.
(j) No misconduct
(k) No misconduct
(l) it will tantamount to professional misconduct as this may be taken to mean as advertisement of professional
attainment
(m) No misconduct
(n) Part 1 of the First Schedule to the Cost & Works Accountants Act, 1959, prohibits a member in practice to
engage in any business or occupation other than the profession of Cost Accountant, unless permitted by the
Council so to engage.
Such prohibition has been introduced as it would not be keeping with the dignity of the profession and may
also enable the member to secure as unfair advantage in his professional practice. In the instant case, Mr. S.
Jain has accepted the appointment of lecturership without obtaining specific and prior approval of the Council.
Accordingly, Mr. S Jain would be guilty of Professional Misconduct.
(o) Part 1 of First Schedule of prohibits use of any designation other than cost accountant on professional
documents, visiting cards, letterheads or sign boards. Thus, it is improper to use designation “Tax Consultant”
and Mr. P. Dhar is guilty of professional misconduct under.
(p) As per MOU with IMA, USA, a member of ICAI can get enrolled as a member of IMA, USA and vice-
versa. However, an IMA member enrolling as member of ICAI will not be allowed to hold a certificate of
practice to undertake any statutory work in India. Mr. P Nadkarni, a Cost Accountant practicing in India and
entering into partnership with R. D. Hones, CMA, USA, amounts to professional misconduct.
(q) A Cost Accountant in practice shall be deemed to be guilty of professional misconduct, if he solicits
clients or professional work either directly or indirectly, by circular, advertisement, personal communication
or interview or by any other means.
CMA, AUSUA being a Cost Accountant in practice has committed a professional misconduct by mentioning
that at present she is a partner of M/s PKR & Associates, a firm of Cost Accountants (Part I of First Schedule
to the Cost and Works Accountants Act, 1959)
(r) The Council of the Institute of Cost Accountants of India had approved posting of particular on website by
Cost Accountants in practice subject to the prescribed guidelines. The relevant guidelines are:
• No restriction on the colours used in the website.
• Names of clients and fees charged not to be given.

Part-I of First Schedule to the Cost and Works Accountants Act, 1959 prohibits a member not to advertise his
professional attainments or services other than Cost Accountant on professional documents, visiting cards,
letter heads or sign boards.
In view of the above, M/s R.K. Bhatia & Associates would have no restriction on the colours used in the
website but failed to satisfy other guidelines by displaying the professional attainments and names of the
clients on the website.
Thus, M/s R.K.Bhatia & Associates would be held guilty of professional misconduct under Part-I of First
Schedule to the Cost and Works Accountants Act, 1959.
(s) Part-I of the First Schedule to the Cost and Works Accountants Act, 1959 aims to restrain a member in
practice from engaging himself in any business or occupation other than that of a Cost Accountant except
when permitted by the Council to be so engaged. Accordingly, in the absence of specific and prior approval,
Cost Accountant would be held guilty of professional misconduct. Thus, in the instant case CMA Dr.
Radhakrishnan would be held to be guilty of professional misconduct.
(t) Part-I of the Second Schedule to the Cost and Works Accountants Act, 1959 states that expressing an
opinion on cost and pricing of any business or any enterprise in which the auditor or his firm or a partner in
his firm has a substantial interest would constitute misconduct, unless he discloses the interest also in his
report.
As per the facts of the case, the firm has been retained to evaluate the cost of products manufactured by it for
its information system and the partner of the firm is a non-executive director in the Company. So this amounts
to Professional misconduct.
(u) As per provisions of Clause 2 of Part II of The First Schedule of The Cost and Works Accountants Act,
1959, stipulates the Professional Misconduct in relation to Cost Accountants in Service. As per the provisions
of Part II of the First Schedule of the Act, a Cost Accountant in Service shall be deemed to be guilty of
Professional Misconduct, if he/she "accepts or agrees to accept any part of fees, profits or gains from a lawyer,
a cost accountant or a broker engaged by such a company, firm or person or agent or customer of such
company, firm or person by way of commission or gratification". In the given case, Mr. Arun, who is working
as a Manager—Cost Accounts of PQR Ltd., accepts 10% of profits from Mr. Raju, who is a legal consultant
of the same company. This amounts to Professional Misconduct.
(v) As per provisions of Clause 2 of Part I of The Second Schedule of The Cost and Works Accountants Act,
1959, stipulates, the Professional Misconduct in relation to Cost Accountants in Practice. As per the
provisions of the Part I of the Second Schedule of the Act, a Cost Accountant in practice shall be deemed to
be guilty of professional misconduct, if he/she "certifies or submits in his/her name, or in the name of his/her
firm, a report of an examination of cost accounting and related statements unless the examination of such
statements has been made by him/her or by a partner or an employee in his/her firm or by another Cost
Accountant in Practice". In the given case, Mr. S. certifies the cost and pricing statement of a company, which
is manufacturing pipes. The statement is to be submitted for a Contract and is not prepared by him. It is
prepared by Mr. T. who is neither a CMA nor an employee of Mr. S. Hence, this amounts to Professional
Misconduct.
Illustration 2: Mr. P. Swamy, the Cost Auditor of PQR Ltd. for the FY 2016-17, was offered an assignment
of Investment Consultant of RST Ltd., a subsidiary of PQR Ltd., for the same year.
(i) Whether the acceptance of the assignment amounts to violation of law and professional misconduct?
(ii) What are the penal provisions, if any? (Mention the relevant provisions.) (June 2017)
Solution: (i) Any person who is engaged in consulting and providing specialized services to a company and its
subsidiary companies is not eligible to act as Cost Auditor [Section 141 of the Companies Act, 2013, read
with Companies (Audit and Auditors) Rules, 2014]. The Cost Auditor cannot accept the assignment as long as
he/she remains appointed as the Cost Auditor of the company.
A member of the institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if—
(1) he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a
term not exceeding six months; (2) in the opinion of the Council he brings disrepute to the profession or the
institute as a result of his action whether or not related to his professional work.[Part IV, The First Schedule]
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he
is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term
exceeding six months.[Part III, The Second Schedule]
(ii) If an auditor has contravened the provisions of the Companies Act, 2013, he/she shall be punishable with
fine which shall not be less than twenty five thousand rupees but which may extend up to five lakh rupees.
When the auditor has contravened knowingly or willfully with the intention to deceive the company or its
shareholders or creditors or tax authorities, he/she shall be punishable with imprisonment for a term which
may extend to one year and with fine, which shall not be less than one lakh rupees but which may extend up to
twenty-five lakh rupees. When the auditor has been convicted as above, he/she shall be liable to refund the
remuneration received and pay for the damages to the company, statutory body or to any other person for the
loss arising out of incorrect statement made in his/her report [Section 147 of the Act].
A member of the Institute, whether in practice or not, shall be deemed to by guilty of other misconduct, if
he/she is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a
term exceeding six months [The Second Schedule, Part III of the Cost and Works Accountants Act, 1959].
Illustration 3: What action amounts to professional misconduct in relation to the members of the ICAI in
service?
Solution: A member of The ICAI in service, i.e., other than a member in practice, shall be deemed to be
guilty of professional misconduct, if he/she being an employee of any company, firm or person—
(1) pays or allows to pay, directly or indirectly, to any person any share in the emoluments of the
employment undertaken by him/her;
(2) accepts or agrees to accept any part of fees, profit or gains from a lawyer, a cost accountant or a broker
engaged by such company, a firm or a person or an agent or a customer of such company, a firm or a
person by way of commission or gratification.
Illustration 4: Mr. X, the Cost Auditor of a company, contributes articles in various papers or journals,
discussing matters of professional interest. In the course of such discussion, he mentions various data which
include some vital, but unpublished, data relating to his client company without its tacit approval. State
whether there is punishment, if any, of the Cost Auditor for such contravention. (December 2017)
Solution: Part I of the Second Schedule to the Cost and Works Accountant’s Act 1959 deals with the
professional misconduct relating to the disclosure of information by a CMA in practice relating to the business
of his /her clients to any person other than his/her without the consent of the client or otherwise than as

required by any law for the time being in force would amount to breach of confidence. The code of ethic
further clarifies that such duty continues even after completion of the assignment. The CMA may, however,
disclose the information in case it is required as a part of performance of his/her professional duties.
In the given case Mr X has disclosed vital information of his client’s business without the consent of the client
under the impression that it will help the profession and the industry at large it is a professional misconduct
covered by Part I of the Second Schedule of the Cost and Work Accountant’s Act 1959.
Illustration 5: A member of the Institute, whether in practice or not, is liable for disciplinary action if he/she
is found guilty of professional and other misconduct. Explain the term ‘other misconduct.” (December 2017)
Solution: As per Part IV of the first schedule to the Institute of Cost and Work Accountant’s Act 1959, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct if-
1. He /She is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding 6 months and
2. In the opinion of the Council he/she brings disrepute to the profession or the Institute as a result of the
action whether or not related to his /her professional work.

Overview of Cost Accounting Standards and GACAP
Cost Accounting Standards (CAS) are a set of standards that are designed to achieve uniformity and consistency
in cost accounting practices. In absence of uniform costing methodologies or disclosure requirements, no
meaningful inter-firm comparisons can be made as to the reasonability of the claims by the units in the industry.
(June 2011)
The benefits of cost accounting standards are that they:
• provide a structured approach to measurement of costs in manufacturing process or service industry;

• integrate, harmonize, and standardize cost accounting principles and practices;
• provide guidance to users to achieve uniformity and consistency in classification, measurement,
assignment, and allocation of costs to products and services;
• arrive at the basis of computing the cost of product, activity, or service where required by legal or
regulatory bodies;
• enable practicing members to make use of Cost Accounting Standards in the attestation of General
Purpose Cost statements; and
• assist in clear and uniform understanding of all the related issues by various user organizations,
government bodies, regulators, research agencies, and academic institutions.
Cost Accounting Standard Board (CASB) / in India (June 2010)
CASB set up by the Council of the Institute of Cost Accountants of India (ICAI). The main objective of CASB is
to
- Provide guidelines on standard cost accounting principles

- Assist companies and Cost accountants in preparation of uniform cost statements
- Develop Cost Accounting Standard on important issues/topics relating to Cost and Management
Accounting
- Assist the management to uniformly follow the standard cost accounting practices in the matter of
compliance of statutory obligations
- Help in maintaining cost accounting records under Section 148(1)
- Help the management in better cost management
CAS prescribed by the CASB / Board in India
Following are the 24 CAS issued by the CASB / Board:
CAS No. Title

CAS 1 Classifications of Costs (Revised in 2015)
CAS 2 Capacity Determination (Revised in 2015)
CAS 3 Production and operation overheads (Revised in 2015)
CAS 4 Cost of Production for Captive Consumption
CAS 5 Determination of Average (Equalized) Cost of Transportation
CAS 6 Material Cost
CAS 7 Employee Cost
CAS 8 Cost of Utilities
CAS 9 Packing Material Cost
CAS 10 Direct Expenses
CAS 11 Administrative Overheads
CAS 12 Repairs And Maintenance Cost

CAS No. Title

CAS 13 Cost of Service Cost Centre
CAS 14 Pollution Control Cost
CAS 15 Selling and Distribution Overheads
CAS 16 Depreciation And Amortisation
CAS 17 Interest And Financing Charges
CAS 18 Research and Development Cost
CAS 19 Joint Cost
CAS 20 Royalty and Technical Know-How Fee
CAS 21 Quality Control
CAS 22 Manufacturing Cost
CAS 23 Overburden Removal Cost
CAS 24 Treatment Of Revenue In Cost Statements

CAS 1: Classification of Cost (Revised 2015)
The standard deals with the principles to be followed for classifying the costs in the cost statement required for
fulfilling the statutory obligations.
Objective: The objective of this standard is to bring uniformity and consistency in the principles of Classification
of Cost for disclosure and presentation in the cost statements of a product or service.
Definitions
Abnormal Cost: An unusual or atypical cost whose occurrence is usually irregular and unexpected and / or due to
some abnormal situation of the production or operation.
Administrative Overheads: Cost of all activities relating to general management and administration of an entity.
Administrative overheads shall exclude production overheads, marketing overheads and interest and finance
charges. Administrative overheads do not include administration cost relating to production, factory, works or
manufacturing.
Classification of cost: Classification of cost is the arrangement of items of costs in logical groups having regard to
their nature (subjective classification) and purpose (objective classification).
Conversion cost: Conversion cost is the production cost excluding the cost of direct materials.
Cost: Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of
goods or rendering services.
Cost Centre: Any unit of an entity selected with a view to accumulating all cost under that unit. The unit can be
division, department, section, group of plant and machinery, group of employees or combination of several units.
Cost Centre may be of following types:-
- Personal and Impersonal Cost Centres - Personal cost centre consists of a person or a group of persons.
Cost centres which are not personal cost centres are impersonal cost centres.
- Operating cost centres and support- service cost centres - Operating cost centres are those which are in
the chain of operations like machine shop, welding shop, assembly shop, operation theatre, call centre and
so on. Support-service cost centres are for rendering services to operating cost centre like power house,
maintenance, stores, help desk, transport for call centre staff and so on.
Cost Object: An activity, contract, cost centre, customer, process, product, project, service or any other object for
which costs are ascertained.
Cost of Production: Cost of production of a product or a service consists of:-
- cost of materials consumed,

- direct employee costs,
- direct expenses,
- production overheads,
- quality control costs,
- packing costs,
- research and development costs and
- administrative overheads relating to production.
Further adjustment for stock of work-in-process, finished goods, recoveries for sales of scrap, wastage and the
like, shall be made.
Cost Unit: Cost Unit is a form of measurement of volume of production of a product or a service. Cost Unit is
generally adopted on the basis of convenience and practice in the industry concerned.

Examples:
• Power - MW
• Cement - MT
• Automobile - Number
• Transportation - Tonne- Kilometre
Prime cost: Prime cost is the aggregate of direct material cost, direct Employee cost and direct expenses.
Production Overheads: Indirect costs involved in the production of a product or in rendering service. The terms
Production Overheads, Factory Overheads, Works Overheads and Manufacturing Overheads denote the same
meaning. Production overheads include administration costs relating to production, factory, works or
manufacturing.
Semi Variable Costs: Semi Variable Costs are the costs that contain both fixed and variable elements. They partly
change with the change in the level of activity.
Variable Costs: Variable costs are the cost which tends to directly vary with the volume of activity. Variable
indirect costs are termed as variable overheads.
Standard Cost: A predetermined cost of a product or service based on technical specifications and efficient
operating conditions. Standard costs are used as scale of reference to compare the actual cost with the standard
cost with a view to determine the variances, if any, and analyse the causes of variances and take proper measure
to control them.
Basic rules governing classification of cost:
1) Costs shall be grouped on the basis of similarities of nature, attributes or relations.

2) Scheme of classification should be such that every item of cost can be classified.
Basis of classifications: Costs can broadly be classified on the following basis:
A. By nature of expense - Material

- Employee
- Expenses
B. By nature of traceability to a - Direct Expenses - Material
cost object - Labour
- Expenses
- Indirect Expenses - Material
- Labour
- Expenses
C. By functions / activities - Production
- Administration
- Selling
- Distribution
- Research & development
D. By Behavior - Fixed
- Variable

- Semi-variable
E. By nature of production - Batch Cost
process - Process Cost
- Operation Cost
- Operating Cost
- Contract Cost
- Joint Cost
A. By Nature of expense: On the basis of its nature the costs can be broadly classified into following 3 parts:
a) Material Cost: Cost of material of any nature used for the purpose of production of a product or rendering of
a service.
It Includes:
- cost of procurement,
- freight inwards,
- taxes & duties,
- insurance etc
directly attributable to the acquisition.
Trade discounts, rebates, duty drawbacks, refunds on account of modvat, cenvat, sales tax etc are deducted
from the cost of material
b) Employee Cost: The consideration (including benefits paid or payable to employees) made to the
employees (permanent or temporary) for their services. Like salaries and wages paid to the permanent and
temporary employees.
It includes:
- all fringe benefits like Provident Fund contribution,
- gratuity,
- ESI,
- overtime,
- incentives & bonus,
- ex-gratia,
- leave encashment,
- wages for holidays and idle time
Other expenses: costs other than material cost and employee cost for the purpose of production of a product
or rendering of a service.
It includes:
- Expenditure on account of utilities,
- payment for bought out services,
- job processing charges etc.
B. By nature of traceability to a cost object: Classification should be on the basis of method of allocation of
cost to a cost unit. On the basis the expense can be classified in the following two categories:
a) Direct expenses: If an expenditure can be allocated to a cost centre or cost object in an economically
feasible way then it is called direct expense (December 2013)

b) Indirect expense: When an expenditure cannot be allocated to a cost centre it is termed as indirect
expenditure. Also known as Overheads.
Direct expenses can again be of three types: Material, Labour and Other expenses. When raw material consumed,
wages of the labour utilized or the other expenses incurred can be readily identified to a particular cost centre then
such expenditure is known as Direct Material Cost, Direct Labour cost and Other direct expenses respectively.
However in case where when the raw material cost or the labour cost or the other cost cannot be directly allocable
to any cost centre or cost object they are termed as indirect expenditure / overheads.
Type of cost Examples of Direct Expenditure Examples of Indirect Expenditure

Material Cost Raw material used in production of a Expenditure on spares, consumables and
specific product. Expenses on special lubricants
moulds developed to produce a product
Labour cost Wages of employees which are involved Salary of administrative staff like
in production of a particular product accounts department or security staff
Other expenses Other expenses which are specifically Insurance of the employees or the factory
incurred for producing a specific product premises
C. By functions/activities: Costs can be classified according to the major functions for which the elements are
used into the following four major functions:
a) Production: All the direct and indirect cost of producing a product or rendering a service is clubbed under
Production Cost. It includes production overheads also which can be related to the production process.
b) Administration: Administration costs are expenses incurred for general management of an organization. These
are in the nature of indirect costs and are also termed as administrative overhead. Eg. Salary of administrative
staff, general office expenditure like printing, stationery etc.
c) Selling: Selling cost are again of the nature of indirect expenses incurred for selling of products and services.
Eg. Salary and travelling cost of sales staff
d) Distribution Costs: Cost incurred in handling a product from the time it is completed in the works until it
reaches the ultimate consumer. Like transportation cost, cost of warehousing etc.
e) Research & Development Expenditure: Cost incurred for undertaking research to improve quality of a present
product or improve process of manufacture, develop a new product, market research etc and commercialization
thereof.
Illustration 1: Where would you classify the following cost on the basis of their function:
a) Primary packaging
b) Secondary packaging cost
c) Cost incurred for commercialization / implementation of research findings. (P, D, R)
D. By Nature / Behavior: Costs are classified based on behavior as (i) fixed cost, (ii) variable cost and
(iii) semi-variable cost depending upon response to the changes in the activity levels.
Fixed costs are also known as period cost and they do not change with a change in volume of activity in
the short run. Eg. Rent of the factory, Depreciation, audit fees. Fixed cost per unit decreases with
increased output

Variable costs are directly proportionate to the volume of activity. They move according to the level of
activity in the same direction. Like material cost, direct labour cost etc. They further can be of two types
Variable direct cost and indirect cost. Variable cost remain constant per unit within a range if activity.
Semi Variable Costs contain both fixed and variable elements. They are partly affected by fluctuation in
the level of activity. It implies that they are fixed till certain point of production level and are variable
beyond that. Eg. Factory power and maintenance – An organization has to incur some level of power and
maintenance cost even of the factory is on a halt. However when the factory is running the cost with vary
as per the production level.
E. By nature of production or operation process: Costs are also classified on the basis of nature of production
or manufacturing process as under:
a) Batch Cost is the aggregate cost related to a cost unit which consists of a group of similar articles or
services which maintain its identity throughout one or more stages of production or operation.
b) Process cost: When the production process is such that goods are produced from a sequence of
continuous or repetitive operations or processes, the cost incurred during a particular process period is
considered as process cost. The process cost per unit is derived by dividing the process cost by
number of units produced in the process during the period.
c) Operation Cost is the cost a specific operation involved in a production process or business activity.
When there are distinctly separate operations involved in a process, cost for each operation is found
out for effective control mechanism. Operating Cost is the cost incurred in conducting a business
activity.
d) Contract cost is the cost of a contract with some terms and condition of adjustment agreed upon
between the contractee and the contractor. Contract cost usually implied to major long term contracts
as distinct from short term job costs.
e) Joint Costs are the common cost of facilities or resources employed in the production of two or more
simultaneously produced or otherwise closely related operations, commodities or services. When a
production process is such that from a set of same input, two or more distinguishably different
products are produced together, products of greater importance are termed as joint products and
products of minor importance are termed as by-products and the costs incurred prior to the point of
separation of the products are termed as Joint Costs.
For example, in a petroleum refinery industry, petrol, diesel oil, kerosene oil, naptha, tar etc are
produced jointly in the refinery process.
Presentation and Disclosure
- Classification of cost should be done on ‘basis of relevant classification’

- Classification of cost item should be followed consistently from period to period.
- A change in classification should be made only if it is required by law or for compliance with a Cost
Accounting Standard or the change would result in a more appropriate preparation or presentation of cost
statements of an enterprise.
- Any change in classification of cost which has a material effect on the cost of the product should be
disclosed in the cost statements. Where the effect of such change is not ascertainable wholly or partly, the
fact should be indicated in the cost statement.
Illustrations

Illustration 1: There was a strike from 13.9.2007 to 16.11.2007 in a company of which you were the cost auditor
for the year ending 31.3.2008. Although the company began working from 17.11.2007 production could
effectively begin only from 5.12.2007. The expenses incurred during the year ended 31.3.2008 were:-
Rupee lakhs
Salaries and wages (direct) 300
Salaries and wages (indirect) 200
Power (Variable) 120
Depreciation 180
Other fixed expenses 240
Detailed examination of the records reveals that of the above the following relate to the period 13.9.2007 to
16.11.2007:-
Rupee lakhs
Salaries and wages (indirect) 70
Depreciation 60
Calculate the amount which, in your opinion, should be treated as abnormal for exclusion from the product costs.
Illustration 2: You are the cost auditor of INDIA JUTE MILLS LTD for the year ended March 31, 2011. The
company had a strike from 15.09.2010. Although the company resumed working from 18.11.2010, normal
production was achieved only from 12.12.2010. The expenses incurred during the year ended March 31, 2011
were:

Salaries and wages (Direct) 450
Salaries and wages (Indirect) 220
Power (Variable) 160
Depreciation 140
Detailed examination of the records revealed that of the above, the following relate to the period 15.09.2010 to
17.11.2010:

Salaries & Wages (Indirect) 80
Depreciation (Non-productive) 50
As a cost auditor you are requested to calculate abnormal cost which will be excluded from the product cost.
(December 2011)
Illustration 3: The following is a summary of the Profit and Loss Account of M/s. Straw Berry Company Limited
for the year ended 31.03.2014
Particulars Rs. in lakh Rs. in lakh

Sales 13,540
Cost of Sales:
Raw Materials, Stores and Spares 5,600
Excise Duty 830
Salaries and Wages 1,400
Power and Fuel 470
Repairs and Maintenance:

Major Breakdown Repairs 35

Other regular maintenance 94

Carriage Outwards 320
Insurance General 34
Insurance-Transit 22
Advertisement and Sales Promotion 720
Rent, Rates and Taxes 97
Printing, Stationery etc. 437
Travelling and Conveyance 776
Other Administrative expenses 426
Depreciation 391
Interest 1,494 13,146
Profit 394
There was a major breakdown of machinery resulting in loss of production for 42 days, in June and July, 2013
and a labour strike for 97 days from 14.2.2014 to 21.5.2014. The Company produced a single product (Steel-
Billet) and the production during the year was 942000 kgs. You are required to compute the amount of abnormal
cost on account of the breakdown and strike and the impact on cost per unit of output. Where do these figures find
a place in the Cost Audit Report? (June 2014 & December 2017)
Illustration 4: You are the Cost Auditor of MERLIN TEXTILE MILLS LTD. for the year ended March 31, 2015.
The Company had a Strike from 16.09.2014 to 19.11.2014. Although the company resumed working from
20.11.2014 normal production was achieved only from 08.12.2014. The expenses incurred during the year ended
March 31, 2015 were

Salaries and wages (Direct) 1800
Salaries and wages (Indirect) 1200
Power (Variable – 90%) 600
Depreciation 1080
Repairs and Maintenance (Variable-80%) 600
Detailed examination of the records reveals that of the above, the following relate to the period 16.09.2014 to
19.11.2014.

Salaries & Wages (Direct) Nil
Salaries & Wages (Indirect) 480
Depreciation (Non-productive) 300
Total 1440
Calculate the amount which in your opinion should be treated as abnormal for exclusion from the product costs.
(June 2015)
Illustration 5: Goodyear Automotives Ltd., located in a coastal state, had faced interruption in production during
the year 2016-17 due to cyclone and flood. Out of total 303 available working days during the year, the
interruptions were: (a) Flood: 4 days, (b) Cyclone: 3 days, and (c) Damage Restoration: 2 days (these exclude
weekly off days falling in between). The unit declared lay-off during such period on payment of average 50%
wages for direct workers. The damage to the plant and the cost of its repairs amounted to Rs. 87 million. Find out
the abnormal expenses deductible from the product cost on the basis of the following expenses incurred in the FY
2016-17: Amount in millions
Direct Wages & Salaries 1230 Indirect wages and salaries 740
Power 820 Depreciation 210
Other Fixed Expenses 490 Finance Charges 115

(June 2017)
Illustration 6: M/s Telekraft Paper Ltd., located in a costal state, had the following days of interruption out of
total 300 working days during the year 2016-17: (a) Flood : 5 days and (b) Cyclone (2 times) - total 3 days.
Disruption in working for 4 days (50% partial) occurred even after resumption of work. There was no cut in
wages as lay-off was not allowed by the State Government. Find out the abnormal cost deductible from the
product cost on the basis of the following expenses incurred in the Financial Year 2016-17:
(Rs. In Lakhs) (Rs. In Lakhs)

Direct Wages & Salaries 1550 Indirect Wages & 970
Salaries
Power 990 Depreciation 350
Other Fixed Expenses 680 Finance Charges 235
(December 2017)

CAS 2: Capacity Determination (Revised 2015)1
This standard deals with the principles and methods of classification and determination of capacity of an entity for
ascertainment of the cost of product or service, and the presentation and disclosure in cost statements.
Need for determination of Capacity
i) To identify capacities of each of deployed facilities and through the process assess bottlenecks;
ii) To evaluate potential for future expansion, understanding the scope and effort towards de-
bottlenecking and balancing of surplus capacities;
iii) Internal management for planning, scheduling of production and monitoring during implementation
of the planned programme
Objective: To bring uniformity and consistency in the principles and methods of determination of capacity with
reasonable accuracy.
Definitions:
Installed Capacity is the maximum capacity of producing goods or providing services, determined either based on
technical specification of the facility or through a technical evaluation. (December 2013, 2015 & 2017).
Normal Capacity is the production achieved or achievable on an average over a period or season under normal
circumstances taking into account the loss of capacity resulting from planned maintenance. Normal capacity is
also known as Practical or achievable capacity. (December 2013 & 2017)
The difference in installed capacity and normal capacity
Normal Idle Capacity = Installed Capacity – Normal Capacity
Actual Capacity Utilization is the actual volume of production achieved in relation to installed capacity.
Idle Capacity is the difference between installed capacity and the actual capacity utilization when actual capacity
utilization is less than installed capacity.
Excess Capacity Utilization is the difference between installed capacity and the actual capacity utilization when
actual capacity utilization is more than installed capacity.
Abnormal idle capacity is the difference between normal capacity and actual capacity utilization where the actual
capacity is lower than the normal capacity (December 2017)
Determination of Installed Capacity: (December 2013)
Installed capacity is determined based on:
i) Manufacturer’s Technical specifications (In case manufacturers technical specifications are not
available, estimates by experts may be considered)
ii) Capacities of individual or interrelated production centres.
iii) Operational constraints / capacity of critical machine
iv) Number of shifts
v) Any other factor
In case a product passes through different production processes and each process is having different capacity then
the process which brings effective or ultimate production shall be considered for deciding installed capacity.
1
Includes the provisions of guidance note on CAS-2

In case some intermediate products / components etc are also produced, they should be taken into consideration
for determining equivalent capacity.
Reassessment of Installed Capacity: Installed capacity shall be reassessed in case of any change due to addition,
deletion, modification or for any other reason from the date of such change. In case any modifications are made in
some machinery or balancing equipment are added subsequently and this results in enhanced installed capacity,
the installed capacity shall be reassessed. Similarly, if a machine is discarded or disposed off, the installed
capacity shall be reassessed accordingly. Addition or deletion shall be effective from the date of such change.
Determination of Normal Capacity (December 2013)
Normal capacity should be determined after adjustment of the following with the installed capacity:
(i) Holidays, normal shut down days and normal idle time.
(ii) Normal time loss in batch change over, preventive maintenance, normal break downs of machines, repairs etc
Choosing the suitable unit for capacity determination
Unit of capacity Situations where it is to be used

Output Quantity This will be applicable only in the case of single product non-seasonal plants.
Available machine or This unit for measuring and expressing capacity will be applicable in most of the
man hours industries particularly where products /sizes/ profiles are manufactured from the same
facilities.
Output quantity of This unit for measuring capacity may be used for joint / by products. In this case, output
standard mix is expressed separately for each product.
Commonly used units for capacity determination
Industry Unit used for capacity determination

Spinning Mills Number of spindles on single shift basis
Hospital Installed capacity is computed on the basis of number of available beds in the Hospital
for In-Patients (IP) multiplied by 365 days.
Actual Capacity is to be calculated on the basis of Number of Bed Days occupied.
In case of different procedures / departments, Capacity is to be determined separately

on the basis of available equipment & facilities.
Airport Capacity of passengers that can be handled by the Airport during peak hours, which
includes Seating capacity, Car Parking and other facilities based on the guidelines of
International Civil Aviation Federation.
Port Available facilities for handling of different materials. Capacity should be determined
Material-wise as different Materials require different handling equipment / mechanisms.
Education Institution Number of Seats available in each Section / Class / Course.
Presentation and Disclosures to be made

- Cost Statements shall present Installed capacity, normal capacity and actual production of goods or
services provided, in absolute terms.
- Actual Capacity utilization shall be presented as a percentage of installed capacity.
- Basis of arriving at the capacity i.e. variables used and assumption made to be disclosed
- changes in the installed capacity (due to modifications, addition or disposal in the machines/ equipment)
and normal capacity with reasons thereof.
- In case some machines are taken on lease or some machines are leased out, their impact in terms of
increase/ decrease in capacity should be disclosed separately.
- In case of low capacity utilization as compared to the installed capacity, controllable and uncontrollable
reasons for the same should be disclosed.
- In case of excess capacity utilization, the same should be disclosed separately in absolute terms and in
terms of percentage with reasons
- Abnormal cost due to under-utilisation of capacity
Illustration 1:
Manufacturers’ Specifications - capacity per hour = 500 units
No of shifts (each shift 8 hours) = 3 shifts
Holidays in a year:
Sundays = 52 days, Other holidays = 13 days (Annual maintenance is done within these 13 holidays)
Preventive Weekly Maintenance for the machine on Sunday.
Normal idle capacity for batch change over, lunch, personal need etc = 1 hr per shift
Production based on sales expectancy in past 5 years = 30.1, 26.9 (abnormal year), 29.7, 24.4 (abnormal year) and
30.2 lakh units
Actual Production for the year = 30.1
Illustration 2: Compute the following with the available data:
a) Installed Capacity
b) Practical Capacity
c) Normal Capacity
d) Actual Capacity
e) Idle Capacity Ratio
Data available:
- Specification of plant production per hour: 600 units of molten

- Sunday: 52; leaves: 12; Absent: 6; Holidays: 15
- Plant is operating over single shift (each containing machine set up time of 1 hour for machine normal
changeover time)
- Plant preventive maintenance shall be done on Sundays only to reduce the waste over working days.
- Atleast 15% of available time is lost due to power cut.
- Due to unavailability of material stock (stock out) approx 5% of machine available time is lost.

- Last year installed capacity was 10% is lower than current year capacity because of higher production
machines replacements.
- Last 3 normal years sales are not provided by the marketing department but external interruption decrease
production by 15 days.
Illustration 3: Jyoti Corporation assembles computer silicon chips to manufacture processors and deliver to
Microsoft under the same patent what they have delivered. Jyoti Corporation is covered under the CCRAR, 2014.
They have to disclose mandatory calculations of capacity under CCRAR, 2014. They are providing sufficient
information regarding their assemblies operations:
1) Total number of workers operated under assemblies operations are 200 (include 50 of grade B), grade B
and grade A are interchangeable among themselves.
2) No of days are 365 as operative days. Worker B takes 10 mins. normally to perform casting over the
processor assemblies, while Grade A takes 15 mins. per processor normally. According to time and
motion study, it is recorded that actually during the year efficiency ratio have been changed.
3) Efficiency of workers: Grade A – 110%; Grade B – 120% recorded during the year performance.
4) Out of the total working days, 15 days have been lost due to internal abnormal interruptions which could
be controlled. 15 days have been lost due to faulty reasons of management. On the other hand it is
predictable that company have to allot holidays and Sundays, these are 60 in count. Moreover, total man
days lost due to avoidable interruption 100; Unavoidable interruption 80.
You are required to compute the installed, practical and actual capacity of Jyoti Corporation as per CAS – 2. Also
compute the idle and abnormal capacity.
Illustration 4: A company is considering the expansion of a manufacturing process by adding more 1 ton
capacity furnaces. Each batch (1 ton) must undergo 30 minutes of furnace time, including load and unload
operations. However, the furnace is used only 80% of the time, due to power restriction in other parts of the
system. The required output for the new layout is to be 16 tons / shift (8 hours). Plant (system) efficiency is
estimated at 50% of system capacity.
a) Determine system capacity and the number of furnaces required

b) Estimate the percentage of time, the furnaces will be idle
Illustration 5: ENRON INDUSTRIES LTD. a manufacturing unit, provides the following extracts from its
records for the year ended March 31, 2012:
The company’s specifications capacity for a machine per hour 1,600 units
No. of shifts (each shift of 8 hours) 3 shifts
Paid holidays in a year (365 days):
(i) Sundays 52 days
(ii) Other holidays 10 days
Annual maintenance is done during the 10 other holidays
Preventive weekly maintenance is carried on during Sundays.
Normal idle capacity due to lunch time, Shift changes etc= 1 hour per shift.

Production based on sales expectancy in past 5 years are: (unit in lakh) = 81.28, 93.86, 70.20, 83.73 and 81.70
respectively.
Actual production during the year: 84.50 lakh units.
You are required to calculate
(i) Installed capacity;
(ii) Practical capacity;
(iii) Actual capacity utilization;
(iv) Normal capacity;
(v) Idle capacity;
(vi) Abnormal idle capacity---- keeping in view of the relevant Cost Accounting Standard (CAS-2).
(Similar - June 2014)
Illustration 6: What is installed capacity and how is this different from total available capacity? How the installed
capacity is to be calculated in a multi-product company using the same machine/ facilities? Should installed
capacity be the capacity at the beginning of the year or at the end of the year under audit? (Final December 2015)
Solution: Installed Capacity is the maximum productive capacity, according to the manufacturer’s specifications
or determined through an expert study.
- The Installed Capacity to be disclosed in the Quantitative Details of CRA-3 is to be considered as at the
beginning of the year.
- Capacity enhanced during the year should be considered as the increase in Installed Capacity during the
year on pro-rata basis. Available capacity is the total installed capacity after adjustment of capacity
enhanced during the year and if any capacity is available by means of leasing arrangement or taking on
third-party capacity for increasing the total capacity.
If the same available capacity is utilised for production of multiple products, the following different basis may be
adopted to determine the available capacity in respect of each of the products:
(i) If the company has a system of allocating the total available capacity for production of multiple
products, then such allocated available capacity is to be considered for the products being
manufactured by utilising the same production facility.
(ii) If the production allocation is not pre-determined and changes from period to period, then the
capacity utilisation is to be determined on the basis of total production of all the products taken
together and the total available capacity should be considered for all the products.
Illustration 7: What is the need of Capacity Determination?
Solution: The capacity details are required for:
i) Identify capacities of each of deployed facilities and through the process assess bottlenecks;
ii) Evaluating potential for future expansion, understanding the scope and effort towards de-
bottlenecking and balancing of surplus capacities;
iii) Internal management for planning, scheduling of production and monitoring during implementation
of the planned programme

Illustration 8: The installed capacity of a spinning mill M/s Knitwell & Co. Ltd. is 26208 spindles on single shift
basis. The actual spindles available (after adjustment of idle spindles) during the year were 25605 spindle on
single shift basis. Total spindle shift worked on three shift basis is 74613 spindle shifts. Find out the actual
capacity utilization.
Illustration 9: The installed crushing capacity of a sugar manufacturing plant located at Dharuheda is 3000 tonne
cane per day. Since it is a seasonal industry, the total number of working days in the year is 150 days. The actual
cane crushed during the year was 284550 tonnes. Compute the actual capacity utilization.
Illustration 10: Rolls Royce India Private Limited has established its car manufacturing unit in India in 2012.
During the beginning of financial year 2014-15, the company had an installed capacity of assembling 12000 cars
p.a. The company made an additional investment in its plant which enhanced the capacity by 4000 cars from
January 1, 2015. Actual cars assembled during the year were 12000 cars. Compute the actual capacity utilisation.
Illustration 11: What is the need for capacity determination?
Solution: The need for determining “production capacity” in respect of industrial organisation in India arises
from the following reasons :-
(i) To meet the requirement under Section 129 of the Companies Act, 2013, that prescribes the form and
contents of the balance sheet as well as profit and loss account (Schedule III of the Companies Act).
(ii) For purpose of Cost Audit Report under section 148 of the Companies Act, 2013 where a cost audit
has been ordered by Government has issued COST ACCOUNTING STANDARD 2 (CAS 2)
regarding ‘CAPACITY DETERMINATION’. The standard will also help the management to identify
the bottlenecks, imbalances and idle capacity for effective use of various resources.
(iii) For internal management purpose, to be used:
(a) in planning, scheduling and controlling production, and
(b) in planning expansion of capacity and correction of imbalances.
(iv) For assessment of capacities for national level planning.
(v) For fixing the price of product(s) after ascertaining the capacity costs and per unit incidence thereof,
and
(vi) For determination of allotment of scarce raw-materials in the form of quotas, import licenses, etc.

CAS 3: Cost Accounting Standard on production and operation overheads (Revised 2015)
The standard deals with the principles and methods of
- classification,
- measurement and
- assignment
of Production and Operation overheads. A system of better distribution of overheads can ensure greater accuracy
in determination of cost of products or services. It is, therefore, necessary to follow standard practices for
classification, measurement and assignment of overheads on a consistent and uniform basis for preparation of cost
statements.
Scope:
This standard shall be applied to cost statements, which require classification, measurement, assignment,
presentation and disclosure of Production or Operation Overheads including those requiring attestation.
Definitions:
Overheads: Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are
not directly identifiable or allocable to a cost object in an economically feasible way2. The same can be classified
as per the classifications discussed in CAS 1 in great detail which are enumerated below:
- Production overheads
- Administrative overheads
- Selling overheads
- Distribution overheads
- Fixed, Variable and Semi Variable overhead etc.
Exclusions from definition of overheads:
- Overheads incurred due to some abnormal situation should not be included in the cost of a product but
should be charged to Costing Profit and Loss Account.
- Overheads not related to business activities like donation, loss / profit on sale of assets
- Borrowing cost and other financial charges
- foreign exchange fluctuations loss
Production or Operation Overheads: Indirect costs involved in the production of a product or in providing
service. The terms Production Overheads, Operation Overheads, Factory Overheads, Works Overheads and
manufacturing overheads denote the same meaning and are used interchangeably. Production or Operation
Overheads include administration cost relating to production, factory, works or manufacturing and providing of
services.
Absorption of Production or Operation Overheads: Assigning of Production or Operation Overheads to cost

objects by means of appropriate absorption rate. Overhead Absorption Rate = Production or Operation Overheads
of the Activity divided by the volume of activity.
Imputed Cost: Notional cost, not involving cash outlay, computed for any purpose.
Principles of Measurement:
Type of Production and Operation Cost Principle of measurement
2
economically feasible way means cost effectiveness in the sense that cost accounting is not too expensive in relation to
expected benefits. In other words, cost-benefit analysis is required to be done before an attempt is made to allocate an
expense to a cost centre.

Production or Operation Overheads representing invoice or agreed price including duties and taxes, and
procurement of resources from outside the organization other expenditure directly attributable thereto net of
discounts (other than cash discounts), taxes and duties
refundable or to be credited
Production or Operation Overheads representing Includes cost incurred in connection therewith. Eg.
utilization of resources within the organization machinery spare fabricated internally or a repair job
carried out internally, includes cost incurred on
material, employees and expenses.
- Any abnormal cost where it is material and quantifiable shall not form part of the Production or Operation
Overheads.
- Production or Operation Overheads shall not include imputed cost.
- Production or Operation Overhead variances attributable to normal reasons shall be treated as part of
Production or Operation Overheads. Overhead variances attributable to abnormal reasons shall be
excluded from Production or Operation Overheads.
- Any subsidy, Grant, Incentive or amount of similar nature received or receivable with respect to
Production or Operation Overheads shall be reduced for ascertainment of the cost of the cost object to
which such amounts are related.
- Fines, penalties, damages and similar levies paid or payable to statutory authorities or other third parties
shall not form part of the Production or Operation Overheads.
- Credits or recoveries relating to the Production or Operation Overheads, material and quantifiable, shall
be deducted from the total Production or Operation overheads to arrive at the net Production or Operation
Overheads. Where the recovery exceeds the total Production or Operation Overheads, the balance
recovery shall be treated as other income.
- Any change in the cost accounting principles applied for the measurement of the Production or Operation
Overheads shall be made only if, it is required by law or for compliance with the requirements of a cost
accounting standard, or a change would result in a more appropriate preparation or presentation of cost
statements of an entity.
Assignment of Production Overheads
While assigning Production or Operation Overheads, traceability to a cost object in an economically feasible
manner shall be the guiding principle. The cost which can be traced directly to a cost object shall be directly
assigned.
Assignment of Production or Operation Overheads to the cost objects shall be based on either of the following
two principles;
i) Cause and Effect - Cause is the process or operation or activity and effect isthe incurrence of cost.
ii) Benefits received – Production Overheads are to be apportioned to thevarious cost objects in
proportion to the benefits received by them.
In case of facilities created on a standby or ready to serve basis, the cost shall be assigned on the basis of expected
benefits instead of actual.
Absorption of Production Overheads
Absorption of Production or Operation Overheads shall be as follows:
1. The variable Production or Operation Overheads shall be absorbed to products or services based on actual
production.
2. The fixed Production or Operation Overheads shall be absorbed based on the normal capacity.
Presentation and Disclosure:

The cost statements shall disclose the following:
- The basis of assignment of Production or Operation Overheads to the cost objects.

- Production or Operation Overheads incurred in foreign exchange.
- Production or Operation Overheads relating to resources received from or supplied to related parties.
- Any Subsidy, Grant, Incentive or any amount of similar nature received or receivable reduced from
Production or Operation Overheads.
- Credits or recoveries relating to the Production or Operation Overheads.
- Any abnormal cost not forming part of the Production or Operation Overheads.
- Any unabsorbed Production or Operation Overheads.
- Disclosures shall be made only where material, significant and quantifiable.
- Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule.
- Any change in the cost accounting principles and methods applied for the measurement and assignment of
the Production or Operation Overheads during the period covered by the cost statement which has a
material effect on the Production or Operation Overheads shall be disclosed. Where the effect of such
change is not ascertainable wholly or partly the fact shall be indicated.

CAS 4: Cost of Production for Captive Consumption
The standard deals with determination of cost of production for captive consumption.
Captive Consumption means the consumption of goods manufactured by one division and consumed by another
division(s) of the same organization or related undertaking for manufacturing another product(s)
Two rules for levy of excise duty on marketable goods:
 Liability of excise duty arises as soon as the goods covered under excise duty are manufactured
 Collected at the time of removal or clearance from the place of manufacture
Should excise duty be levied on goods consumed for captive consumption? If yes, how? [1982]
As per the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000,
Assessable Value of goods used for captive consumption= 110% (115% before 05, August 2003) of cost of
production of such goods.
Objective
- Uniformity and consistency in methods and principles used for determining cost of production of
excisable goods used for captive consumption
- the cost statement prepared based on standard will be used for determination of assessable value of
excisable goods used for captive consumption.
- The standard and its disclosure requirement will provide better transparency in the valuation of excisable
goods used for captive consumption.
Scope
- To determine cost of production of goods used for captive consumption

- Components of cost of production are already defined in CAS -1.
Definitions
Cost of Production Cost of production of goods used for captive

consumption #
Material* + Direct Wages and Salaries* + Direct Cost of production + Opening work in progress and
Expenses* + Works Overheads* + Quality finished goods*** - Closing work in progress and
Control cost* + Research and Development finished goods*** - Sale of scrap
Cost* + Packing cost* + Administrative
Overheads relating to production**.
* All the expenses shall be computed as per the principles laid down by the CAS – 1
** To be determined as per CAS – 3
*** WIP to be valued at cost on the basis of stages of completion
# (ICWAI Final December 2009)
Explain Treatment of following while determining cost of production of goods produced for captive
consumption:
1) Joint products - joint costs are allocated between the products on a rational and consistent basis. E.g.
Sales Value at the split off point may be used as a basis

2) By-products - the net realisable value of by-products is credited to the cost of production of the main
product
3) Scrap and waste –
In case scrap has a ready market and realizable value - Realised / realizable value shall be deducted
can determined to cost of production
In case scrap does not have a ready market and it is - Value of input cost on the stage at which it
used for reprocessing is recycled
If cost is incurred to reprocess the scrap, its cost should be deducted from the input cost of scrap at the relevant
stage.
Illustration 1: A production process has three stages.
Stage Input material cost (Rs/MT) Processing cost (Rs/MT) Total

(Rs/MT)
1 2000 500 2500
2 2500 1000 3500
3 3500 1000 4500
If during the production process at stage 3, the scrap is produced and the same is recycled at stage 2 after making
an expenditure of Rs 200 per MT to make it suitable for re-processing at stage 2, then scrap will be valued @ Rs
(2500 – 200) i.e. Rs 2300. If no expenditure is involved to make scrap re-usable, the scrap value will be @ Rs
2500.
The scrap value for the scrap produced during a period calculated at the rate as explained above may be deducted
to find out the cost of production for the period.
4) Miscellaneous Income – Adjusted in cost of production. Like income from sale of empty containers used
for dispatch of the captively consumed goods.
5) Inputs received free of cost – In case any input material, whether of direct or indirect nature, including
packing material is supplied free of cost by the user of the captive product, the landed cost of such
material shall be included in the cost of production.
6) Moulds, Tools, Dies & Patterns etc received free of cost: The amortization cost of such items shall be
included in the cost of production
7) Interest and financial charges: Interest and financial charges being a financial charge shall not be
considered to be a part of cost of production.
8) Abnormal and non-recurring cost: Does not form part of cost of production [Abnormal means unusual /
unexpected occurrence of events under abnormal situations like heavy break down of plant, accident,
VRS retrenchment compensation / lay off wages etc.]
Disclosure:
- Change in cost accounting principles and policies.

- Where opening and closing stock of WIP are not readily available for certification purpose, the same
should be disclosed

Annexure 1
Name of the Manufacturer:
Address of the manufacturer:
Registration no of manufacturer:
Description of product captively consumed:
Excise Tariff Heading:
Statement of cost of production of __________ manufactured / to be manufactured during the period _________
Qty
Q1 Quantity produced
Q2 Quantity dispatched
Particulars Total Cost /
Cost(Rs.) Unit(Rs.)
1. Material Consumed
2. Direct Salaries and wages
3. Direct expenses
4. Works overheads
5. Quality control cost
6. Research & Development Cost
7. Administrative Overheads (relating to production activity)
8. Total (1 to 7)
9. Add : Opening stock of Work - in –Progress
10. Less : Closing stock of Work -in- Progress
11. Total (8+9-10)
12. Less : Credit for Recoveries/Scrap/By-Products / misc income
13. Packing cost
14. Cost of production (11 - 12 + 13)
15. Add: Inputs received free of cost
16. Add: Amortised cost of Moulds, Tools, Dies & Patterns etc received free of
cost
17. Cost of Production for goods produced for captive consumption (14+15+16)
18. Add : Opening stock of finished goods
19. Less : Closing stock of finished goods
20. Cost of production for goods dispatched (17+18-19)
Seal & Signature of Company's Authorised Representative
I/We, have verified above data on test check basis with reference to the books of account, cost accounting records
and other records. Based on the information and explanations given to me/us, and on the basis of generally
accepted cost accounting principles and practices followed by the industry, I /We certify that the above cost data
reflect true and fair view of the cost of production.
Date : Seal & Signature of Cost Accountant

Place : Membership No.

Practical Problems
Illustration 1: Circular 643 is relevant for valuation of captively consumed goods used to manufacture the
excisable goods, is this statement appropriate? State with reasons.
Solution: CAS 4 is relevant to estimate the assessable cost of production for application of Rule 8.
Illustration 2: Material cost comprises all duties and taxes either refundable or refunded. State, with reasons,
whether the statement is correct or not.
Solution: Incorrect. Only refundable or adjustable (reasonably ascertainable at the time of acquisition) taxes and
duties shall be excluded from the landed cost of material.
Illustration 3: Devyani Beverages is producing SLICE product with its basic material mango-pulp, which is to be
purchased from un-reliable supplier in Hyderabad, hence to control quality management circles, company have
decided to produce mango pulp inside the factory. Calculate the cost of production relating to captively consumed
mango-pulp according to CAS-4 captive consumption valuation under Rule 8 with the following information
provided by cost accounting records:-
1) Purchase cost of material (basic value) Rs. 100,000 (1,000 kgs)

2) Add: Excise duty 15% (100% refundable)
3) Add: VAT 10% (100% refundable)
4) Freight inwards 2% on MRP
Handling cost 0.5% on MRP
5) Supplier remit 20% purchase value on account of spoilage during the transit (either spoilage is normal or
abnormal, but supplier commit to pay only purchase basic value, not excise and VAT portion, since these
are 100% refundable)
6) 10% is the normal spoilage; actual good rating unloaded load is 880 kgs.
7) Direct wages Rs. 80,000 (which do not include PF contribution of Rs. 12,000; medical benefits of Rs.
10,000 and subsidized food facility of Rs. 5,000)
8) Layoff wages Rs. 40,000 and VRS compensation paid Rs. 120,000 (relating to period of captive
consumption production)
9) Cost of fuel used in production Rs. 20,000
10) Heavy repair cost Rs. 40,000 to be paid for major break down of plant during the production of captive
consumption. Accidental charges to be paid to the workers for damages Rs. 20,000.
11) Amortised costs of moulds Rs. 2,000; patterns cost Rs. 3,000; Hire charges Rs. 4,000
12) Quality control cost Rs. 12,000
13) Packing cost (essential for captive consumption) Rs. 20,000
14) Overheads (production and administration of production) Rs. 300,000 per annum, out of which absorbed
over captive consumption is Rs. 40,000.
15) During the production of captive consumption, by-product emerged whose active market sale realization
is Rs. 20,000
16) Scrap realized from this process, can be used in the production of captive consumption on the place of
material Y (used in another process), whose purchase price is Rs. 20,000 but realizable value of scrap is
Rs. 2,000. But for usage, modification cost Rs. 3,000 is incurred before modification.
17) Free of cost material from sister concern is to be used in production of captive consumption, its landed
cost to sister concern is Rs. 1,500 and but its replacement cost Rs. 2,000 at now.
18) Captive consumption consists 20 days production cycle. Hence a total financial borrowing cost
attributable to that period is Rs. 24,000.

Illustration 4: Compute the rate of input cost of material (which is resulted as scrap from Process III) can be used
in the process II with an incremental cost of Rs. 15 per kg.
Following is the information regarding the process:
Process Cost of input per kg. Other Cost per kg. Total Cost per kg.
I 200 60 260
II 150 110 360
III 250 120 370
Solution: Rs. 135 per kg.
Illustration 5: In Illustration 4 above, consider the active market of scrap @ Rs. 140, but before sale in active
market, company has to convert into saleable condition with incremental cost of Rs. 3 per kg. Compute the correct
cost of input in context of CAS 4.
Solution: Rs. 137 per kg.
Illustration 6: Raj & Co. furnish the following expenditure incurred by them and want you to find the assessable
value for the purpose of paying excise duty on captive consumption. Determine the cost of production in terms of
rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 and as per CAS-4
(cost accounting standard) (i) Direct material cost per unit inclusive of excise duty at 10% - Rs. 1,320 (ii) Direct
wages - Rs. 250 (iii) Other direct expenses - Rs. 100 (iv) Indirect materials - Rs. 75 (v) Factory Overheads - Rs.
200 (vi) Administrative overhead (25% relating to production capacity) Rs. 100 (vii) Selling and distribution
expenses - Rs. 150 (viii) Quality Control - Rs. 25 (ix) Sale of scrap realized - Rs. 20 (x) Actual profit margin -
15%.
Illustration 7. Determine the cost of production on manufacture of the under-mentioned product for purpose of
captive consumption in terms of Rule 8 of the Central Excise Valuation (DPE) Rules, 2000 - Direct material - Rs.
11,600, Direct Wages & Salaries - Rs. 8,400, Works Overheads - Rs. 6,200, Quality Control Costs - Rs. 3,500,
Research and Development Costs - Rs. 2,400, Administrative Overheads - Rs. 4,100, Selling and Distribution
Costs Rs. 1,600, Realisable Value of Scrap - Rs. 1,200. Administrative overheads are in relation to production
activities. Material cost includes Excise duty Rs. 1,054.
Illustration 8: Hero Electronics Ltd. is engaged in the manufacture of colour television sets having its factories at
Kolkata and Gujarat. At Kolkata the company manufactures picture tubes which are stock transferred to Gujarat
factory where it is consumed to produce television sets. Determine the Excise duty liability of captively consumed
picture tubes from the following information: - Direct material cost (per unit) Rs. 800; Direct Labour Rs. 100;
Indirect Labour Rs. 50; Direct Expenses Rs. 100; Indirect Expenses Rs. 50; Administrative Overheads Rs. 50;
Selling and Distribution Overheads Rs. 100. Additional Information: - (1) Profit Margin as per the Annual Report
of the company for 2012-13 was 12% before Income Tax. (2) Material Cost includes Excise Duty paid Rs. 73 (3)
Excise Duty Rate applicable is 12%, plus education cess of 2% and SHEC @ 1%.
Illustration 9: The following particulars pertaining to Product A are extracted from the record of PROTECT
LTD. for the half year ended March 31, 2014:
Particulars Amount (In Rs. ‘000)

Direct Material Cost per unit inclusive of Excise Duty of Rs. 191 thousand 1740
Direct Wages and Salaries 1260
Direct Expenses 200
Indirect Material 253
Factory Overhead 677
Administrative Overheads (25% relating to Production activities) 1240
Quality Control Cost 525
Research & Development Cost 360
Selling and Distribution cost 130
Sale of scrap realized 180
Profit Margin 15%
You are required to determine the cost of production for purpose of captive consumption in terms of Rule 8 of the
Central Excise Valuation (DPE) Rules 2000 and as per CAS-4 and Assessable Value for purpose of paying excise
duty on captive consumption. (June 2014, Similar December 2016)
Illustration 10: The following particulars pertaining to product AZ are extracted from the record of SHINJIN
LTD. for the half year ended March 31, 2015.
Amount in Rs. Thousand
Direct Material Cost 827
Direct Wages and Salaries 200
Indirect Materials 75
Direct Expenses 100
Factory overheads 200
Administrative overheads 100
(20% relating to production activities)
Research and Development Cost 25
Selling and Distribution Expenses 15
Sale of Scrap realised 20
Material Cost includes Excise duty paid 27
Actual Profit Margin 15%
You are required to determine:
(1) the Cost of production for purpose of CAPTIVE CONSUMPTION in terms of Rule 8 of the Central Excise
Valuation (Determination of Price of Excisable Goods) Rules 2000 and as per CAS-4 and
(2) Also Assessable value for the purpose of paying excise duty on Captive Consumption. (June 2015)

Illustration 11: The following particulars pertaining to production of yarn are extracted from the records of
Balarampur Textiles Ltd. for the year ended March 31, 2017:
Particulars Rs. ‘000

Direct Material Cost per unit inclusive of Excise Duty Rs. 280 thousand 2,560
Direct Wages & Salaries 1,540
Direct Expenses 450
Indirect Materials 533
Factory Overheads 897
Administrative Overheads (40% relating to Production activities) 1,250
Research and Development Cost 600
Interest on Working Capital 350
Sale of Scrap Realised 460
You are to determine the cost of production for the purpose of captive consumption in terms of the Rule 8 of the
Central Excise Valuation (DPE) Rules 2000 and as per the CAS-4 and the Assessable Value for the purpose of
paying Excise Duty on captive consumption. (December 2017)

CAS 5: Determination of Average (Equalised) Cost of Transportation
To standardize the record keeping of expenses relating to transportation and computation of transportation cost.
Finance Act, 2003 specifies the certification requirements of transportation cost for claiming deduction while
arriving at assessable value of excisable goods cleared for home consumption / export.
Objectives:
- To bring uniformity in the application of principles and methods used in the determination of
averaged/equalized transportation cost
- To prescribe the system to be followed for maintenance of records of cost of transportation, its
allocation/apportionment to cost centres/cost units
- Provide transparency in determination of cost of transport
Definitions:
Cost of Transportation comprises of the cost of freight, cartage, transit insurance and cost of operating fleet and
other incidental charges whether incurred internally or paid to an outside agency for transportation of goods but
does not include detention and demurrage charges.
Inward Transportation cost is the transportation expenses incurred in connection with materials /goods received
at factory or place of use or sale/removal.
Outward Transportation cost is the transportation expenses incurred in connection with the sale or delivery of
materials or goods from factory or depot or any other place from where goods are sold /removed
Freight is the charges paid or payable to an outside agency for transporting materials/ goods from one place to
another place.
Cartage is the expenses incurred for movement of goods covering short distance for further transportation for
delivery to customer or storage.
Transit insurance cost is the amount of premium to be paid to cover the risk of loss /damage to the goods in
transit.
Depot is the bounded premises /place managed internally or by an agent, including consignment agent and C & F
agent, franchisee for storing of materials/goods for further dispatch including the premises of Consignment Agent
and C&F Agent for the purpose. It includes warehouses, go-downs, storage yards, stock yards etc.
Equalized transportation cost means average transportation cost incurred during a specified period.
Equalized freight means average freight.
Maintenance of records for ascertaining Transportation Cost
Proper records shall be maintained for recording the actual cost of transportation showing each element of cost
separately. Abnormal costs and non-recurring costs relating to transportation, if any, are to be identified and
recorded for exclusion of computation of average transportation cost.
Following are the details need to be disclosed while recording the transport cost:
In case of own transport fleet Records shall be maintained to determine the actual operating cost
of vehicles showing details of various elements of cost, such as:-
- salaries and wages of driver, cleaners and others;
- cost of fuel,

- license fee, permit fees, insurance of vehicle

- lubricant grease,
- amortized cost of tyres and battery over its useful life*,
- repairs and maintenance,
- depreciation of the vehicles*,
- distance covered and trips made,
- goods hauled and transported to the depot
In case of hired transportation - charges incurred for dispatch of goods,
- date of dispatch of goods,
- type of transport used,
- description of the goods,
- destination of buyer,
- name of consignee,
- challan number,
- quantity of goods in terms of weight or volume,
- distance involved,
- amount paid
*assets register should be maintained for determination of depreciation and amortization cost.
Separate records must be maintained for inward and outward movement of goods. Cost of inward movement of
goods must be included in the cost of procurement of goods and outward cost must be included in the cost of
sales. Separate cost sheet to be prepared for different type of vehicles.
Records for transportation cost for goods involved exclusively for trading activities shall be maintained separately
and the same will not be included for claiming any deduction for calculating assessable value excisable goods
cleared for home consumption.
Transportation cost Records can be maintained in the 3 Appendices prescribed within the CAS. A brief of the
Appendices are given below:
- Appendix 1 shows the details of information to be maintained for compilation of transport cost for own
fleet.
- Appendix 2 shows the details of information to be maintained for compilation of transport cost for hired
fleet.
- Separate records of cost for mode of transportation other than road like ship, air etc are to be maintained
in Appendix –2 which will be included in total cost of transportation
- Records of transportation cost directly allocable to a particular category of products should be maintained
separately in Appendix 3
Treatment of Cost
Type of Transportation Cost Treatment

Inward transportation costs forms part of the cost of procurement of materials which are to be identified
for proper allocation/ apportionment to the materials / products.
Outward transportation cost forms part of the cost of sale and shall be allocated / apportioned to the
materials and goods on a suitable basis. Outward transportation cost of a
product from factory to depot or any location of sale shall be included in the
cost of sale of the goods available for sale.
The following basis may be used, in order of priority, for apportionment of outward transportation cost depending
upon the nature of products, unit of measurement followed and type of transport used:

(i) Weight
(ii) Volume of goods
(iii) Tonne-Km
(iv) Unit / Equivalent unit
(v) Value of goods
(vi) Percentage of usage of space
- Once a basis of apportionment is adopted, the same should be followed consistently.

- For determining the transportation cost per unit, distance shall be factored in to arrive at weighted average
cost.
- Abnormal and non recurring cost shall not be a part of transportation cost.
- Penalty, detention charges, demurrage and cost related to abnormal break down will not be included in
transportation cost.
Practice Questions
Illustration 1: How to treat Inward Transportation Cost as per the Cost Accounting Standard 5? How
Transportation Cost is to be determined in case the manufacturer is having its own transport fleet?
(December 2017)
Solution: As per the Cost Accounting Standard 5, Inward transportation cost is the transportation expenses
incurred in connection with the materials/goods received at factory or place of use. Inward transportation costs
shall form the part of the cost of procurement of materials which are to be identified for proper
allocation/apportionment to the materials/ products.
In case of a manufacturer having his own transport fleet, proper records shall be maintained to determine the
actual operating cost of vehicles, showing the details of various elements of cost, such as salaries and wages of
driver, cleaners and others, cost of fuel, lubricant, grease, amortised cost of tyres and battery, repairs and
maintenance, depreciation of vehicles, distance covered and trips made, goods hauled transported to the depot.
Separate records should be maintained as per Appendix 1 to the standard separately for
(i) Inward transportation

(ii) Outward transportation
(iii) Movement for home consumption and export
(iv) Separate for production and trading activities
(v) Separate for transportation other than by road, viz, by air, etc.

CAS 6: Material Cost (Readwith Guidance Note on CAS 6)
To determine the principles and methods of classification, measurement and assignment of material cost, for
determination of the Cost of product or service, and the presentation and disclosure in cost statements.
Objective: The objective of this standard is to bring uniformity and consistency in the principles and methods of
determining the material cost with reasonable accuracy.
Definitions
Cost Object: This includes a product, service, cost centre, activity, sub-activity, project, contract, customer or
distribution channel or any other unit in relation to which costs are ascertained.
Defectives: End Product and/or intermediate product units that do not meet quality standards. This may include
reworks (Defectives which can be brought up to the standards by putting in additional resources) or rejects
(Defectives which cannot meet the quality standards even after putting in additional resources and are disposed
off as waste).
Waste: Material loss during production or storage due to various factors such as evaporation, chemical reaction,
contamination, unrecoverable residue, shrinkage, etc., and discarded material which may or may not have value
Spoilage: Production that does not meet with dimensional or quality standards in such a way that it cannot be
rectified economically and is sold for a disposal value. Net Spoilage is the difference between costs accumulated
up to the point of rejection and the salvage value.
Property plant and equipment (PPE): Tangible assets that are:
a) Held for use in the production of goods or supply of services, for rental to others, for administrative,
selling or distribution purposes; and
b) Are expected to be used during more than one accounting period
Types of Material covered by the CAS (GN)
a) Raw Material – Basic / main material used in process of manufacturing. Eg. Sugarcane in sugar industry,
green tea leaves for tea industry, coffee beans for coffee powder industry.
b) Process Material / Additions – Material used in addition to raw material. Eg. Lime used in sugar industry,
sulphur used in cement industry.
c) Manufactured / bought out components – Product which form part of the main product. It is fitted to the
final product without any further processing. Eg. Fan belt in fan manufacturing industry.
d) Sub-assembly / Aggregates – Assembly of various components having distinct identity to form final
goods. Eg. Steering wheel in automobile industry.
e) Accessory – Components in sub-assembly which are not essential for basic functioning of the product.
Eg. AC or music system in automobile industry.
f) Consumable Stores / Spares – Items used in maintenance of plant. Eg. Lubricant Paint / Oil. Spares are
purchased items used for replacement of worn out parts of machine.
g) Other Indirect Material – Items of small value. Eg. – Nuts, Bolts, Nails. It’s cost is typically not identified
with a particular product, hence, indirect material.
CAS 6 does not deal with Packing material cost. The same is dealt with by CAS 9.
Material acquired in exchange of other material / service values at the cost of material acquired plus other
applicable cost like freight.

Valuation of material receipt
Valuation of valued as a total of –

purchased - purchase price including duties and taxes,
material - freight inwards,
- insurance, and
- other expenditure directly attributable to procurement (net of trade discounts, rebates,
taxes and duties refundable or to be credited by the taxing authorities) which can be
quantified with reasonable accuracy at time of procurement Like harbor dues,
stevedoring charges in case of imported material
Self valued including –
manufactured - direct material cost,
materials - direct employee cost,
- direct expenses,
- factory overheads, and
- share of administrative overheads relating to production.
but excluding:-
- share of other administration overheads like those relating to selling and distribution
activities;
- finance cost and
- marketing overheads.
In case of captive consumption, the valuation shall be in accordance with CAS -4
Items such as spare parts, stand-by equipment and servicing equipment are recognized as PPE when they meet the
definition of PPE and depreciated accordingly.
The foreign exchange component of imported material cost shall be converted at the rate on the date of the
transaction. Any subsequent change in the exchange rate till payment or otherwise shall not form part of the
material cost.
Normal loss or spoilage of material prior to reaching the factory or at places where the services are provided shall
be absorbed in the cost of balance materials net of amounts recoverable from suppliers, insurers, carriers or
recoveries from disposal.
Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture etc., before the
material is received shall be absorbed in material cost to the extent they are normal, with corresponding
adjustment in the quantity.
Any demurrage (paid to railways for delay in clearing the goods) or detention charges, or penalty levied by
transport or other authorities shall not form part of the cost of materials.
Subsidy/Grant/Incentive and any such payment received/receivable with respect to any material shall be reduced
from cost, in the financial year in which such subsidy or grant or incentive is recognized as income.
Finance costs incurred in connection with the acquisition of materials shall not form part of material cost. E.g.
Cost of borrowing funds.
Some miscellaneous points on principles of valuation of receipt of material (GN)
1) Preparatory Cost (Cost incurred for bringing the raw material to the place of manufacture) – In case
preparatory cost is traceable to the product manufactured, its cost shall be included in material cost. Eg.
Cost of dressing sugarcane before crushing, seasoning of grapes for preparing Wine.

2) Handling Cost upto Works / factory gate – Assigned to material cost, if own employees used, their
salaries are apportioned according to time taken by them
3) Incoming Inspection – If done by third party, the cost incurred is assigned to the product and if it is done
internally, the salary cost is apportioned on the basis of time spent on inspection.
4) Insurance Cost – Premium assigned to specific material if it can be identified. In case of a single
comprehensive insurance policy, the premium cost will be assigned on the basis of proportionate value
insured. However if the insurance is responsibility of carrier, then no cost hence no apportionment.
5) Cost of containers for carrying material - Container’s cost is to be treated as follows:
- Non-returnable Container – Container cost, either charged separately in invoice or imbibed in cost of
material, shall form part of material cost. In case there are any credit / recoveries on account of sale of
containers (as scrap or otherwise), it may be deducted from the cost.
- Returnable Container (Cost charged in invoice but refunded when container is returned) – Container
cost is included in cost of material net of charge for returnable container. Eg. If out of the charged value
of Rs. 100, Rs. 60 is returned back, the net cost will be enhanced by Rs. 40.
6) Normal Loss (Prior to reaching the factory) – Normal loss shall be absorbed to cost of balance products.
Eg. Loss (Normal) due to evaporation shrinkage and gain on account of elongation or absorption of
moisture should be absorbed in cost of material.
Example –
10,000 units of raw material was purchased @ Rs. 4 per unit – Rs. 4,000. Anticipated normal loss due to
shrinkage during transit – 4% i.e. 40 units.
In this case receipts shall be valued at – 960 units @ 4.17 (Rs. 4,000 / 960 units)
In case there is gain in quantity, the rate of material shall be reduced.
Some miscellaneous points on valuing the imported material (GN):-
 Actual custom paid on the basis of classification by the customs authorities will be assigned, net of any
credits. Higher duty paid under protest will not be included in cost if there is reasonable expectation that the
entity will satisfy the conditions for the excess duty to be refunded.
 Material imported free of duty or at concessional rate (under export incentive scheme) will be accounted for
at the actual rate of duty applicable so long as there is a reasonable expectation that the entity will satisfy
the conditions for the duty exempted or concession.
 Harbor Dues, stevedoring charges (loading / unloading of cargo), congestion charges, and the like are to be
added to the cost of packing material, on the basis of actual.
 In case packing material is imported as a basket, then the cost is to be apportioned on a suitable basis like
weight, volume, or value.
 Charges incurred on intermediate storage are to be included in cost
 Commission agent charges, Letter of Credit (LC) Charges will added to the cost
 Bank Charges which are in the nature of borrowing cost or administrative overheads will not form part of
packing material cost.
Principles of valuation of material issued
Issues shall be valued using appropriate methods as per the provisions contained in the accounting standard
applicable for time being in force. The method of valuation shall be followed on a consistent basis.
Abnormal cost shall be excluded from the material cost.
Some miscellaneous points on valuation of material issues emanating from GN
1) Where materials are accounted for at standard cost – Variance from actual cost shall be treated as follows:
- Price Variance – Added to material cost in its entirety

- Usage Variance – Abnormal usage variance shall be taken to Costing P&L account and not included in
material cost. Normal Usage Variance is to be added to material cost.
2) Transportation Cost incurred to transport material to production line – Inward freight shall be added to
Material cost in case it is directly assignable to a particular product. In case it is incurred for more than
one product, it shall be assigned on the basis of principles of CAS – 5.
Assignment of costs – Materials
Assignment of material costs to cost objects: Material costs shall be directly traced to a Cost object to the extent it
is economically feasible and /or shall be assigned to the cost object on the basis of material quantity consumed or
similar identifiable measure and valued as per the principles laid down above.
Some miscellaneous points on assignment of material cost emanating from GN
1) Following two methods may be used to assign cost to the cost objects:
a) On the basis of actual issues for batch, unit or job – In this case direct relationship can be established
for actual material used for the product. Cost may be assigned directly in an economically feasible
manner.
b) On the basis other than actual cost like standard costing – No direct relationship can be established.
Standard cost is defined in the beginning of the year. The variances are adjusted to consumption at the
year end, if normal.
2) Where a material is processed or part manufactured by a third party according to specifications provided
by the buyer, the processing / manufacturing charges payable to the third party shall be treated as part of
material cost. Eg. Polishing, machining, heat treatment, in case the same is sub-contracted.
3) Cost of materials like catalysts, dies, tools, moulds, patterns etc. which are relatable to production over a
period of time shall be amortised over production units benefitted by such costmater.
Disclosures
- Quantity and rates of items which form 5% of cost of materials shall be disclosed separately while the
other items could be aggregated. In case any item of material is less than 5% but warrants a separate
disclosure due to its significance / nature, same shall be disclosed separately.
- The basis of valuation of materials, work-in-progress and finished goods.
- Any change in the cost accounting principles and methods applied for the determination of the material
cost during the period covered by the cost statement (Where the effect of such change is not ascertainable
wholly or partly, the fact shall be indicated).
- Any abnormal cost excluded from the material cost
- Any demurrage or detention charges, penalty levied by transport or other authorities excluded from the
material cost
- Any Subsidy/Grant/Incentive or any such payment reduced from material cost
- Cost of Materials procured from related parties (relationship, nature of transaction and volume of
transaction to be disclosed)
Disclosures shall be made only where significant, material and quantifiable. Disclosures may be made in the
body of the Cost statement or as a footnote or as a separate schedule.

Inventory of Work-In-progress (WIP) and finished goods (FG)3
Quantitative records of all WIP, FG or services rendered showing production, issues for sale and balance for
different type of goods or services shall be maintained.
Records of physical verification may be maintained in respect of all items held in stock such as raw material,
WIP, FG packing material etc. Reasons for shortages or surplus arising out of such verifications and the method
followed adjusting the same in the cost statements shall be indicated.
Illustrations
Illustration 1: Material purchased 10,000 kgs. and inspected over gate. Approx. 3% of the weight can be normal
moisture elongation, but exceeding moisture shall be treated as abnormal and cost shall be transferred to profit
and loss account. Price per kg is Rs. 10. Compute the material cost that shall be debited to material as per CAS6
and also compute the abnormal gain/loss to be credited to the P&L account. Actual moisture reported 8% of the
total weight.
Illustration 2: Defective material implies two varieties first is rework and second is rejects. Material cost shall
not include both of them because they do not meet standard requirements of production. Is the statement right?
Solution: The material cost of normal scrap/ defectives which are rejects shall be included in the material cost of
goods manufactured. The material cost of actual scrap / defectives, not exceeding the normal shall be adjusted in
the material cost of good production. Material Cost of abnormal scrap /defectives should not be included in
material cost but treated as loss after giving credit to the realisable value of such scrap/ defectives.
Illustration 3: Material purchased at landed cost per kg of Rs. 180, which includes the following:
1) Excise Duty of Rs. 12,000 (Non-refundable)

2) VAT of Rs. 2,900 (Non-refundable)
3) Interest over loan taken to purchase the material of Rs. 3,000
4) Inward freight calculated as per CAS 5 of Rs. 2,700
2Total weight purchased 10,000 kgs. but received only 9000 kgs. (out of which 400 kg are normal transit
loss). Compute the material cost as per CAS 6.
Illustration 4: Material purchased 12,000 kgs from supplier and it is expected that 4% is normal spoilage of
material prior to reaching the factory. Landed price per received kg is Rs. 126 and that price is computed with
inclusion (addition of cost / reduction of grants / subsidy) of following:
1) Forex loss of Rs. 12,566

2) Demurrage charges paid at custom port Rs. 14,899
3) Grant and subsidy received from state government Rs. 25,000
Actual spoilage is 8% of total weight ordered. Company is paying transit insurance and 60% purchase normal cost
is recoverable from insurer. Estimate the material cost of purchase after treatment of all above mentioned items.
3
Maintaining physical verification records of inventory is a mandatory requirement as per Form CRA 1.

Illustration 5: Purchase of Materials Rs. 2,00,000 (inclusive of Trade Discount Rs. 3,000); Fee on Board Rs.
10,000; Import Duty paid Rs. 15,000; Freight inward Rs. 20,000 ; Insurance paid for import by sea Rs.12,000;
Rebates allowed Rs. 4,000; Cash discount Rs. 3,000; CENVAT Credit refundable Rs. 7,000; Subsidy received
from the Government for importation of these materials Rs. 18,000. Compute the landed cost of material (i.e.
value of receipt of material).
Illustration 6: Valuation of Receipt of Material
Purchase of Materials Rs. 5,00,000 (inclusive of Trade Discount Rs. 8,000); Import Duty paid Rs. 45,000; Freight
inward Rs. 62,000 ; Insurance paid for import by air Rs. 28,000; Rebates allowed Rs. 10,000; Cash discount Rs.
3,000; CENVAT Credit refundable Rs. 7,000; Abnormal Loss of Materials Rs.14,000; Price variation due to
computation of cost under standard rates Rs. 1,500. Compute the landed cost of material.
Illustration 7: Valuation of Receipt of Material (special treatment related to exchange rate difference)
Purchase of Materials $ 50,000 [Forward contract rate $ = 54.40 but $ = 54,60 on the date of importation]; Import
Duty paid Rs.5,65,000; Freight inward Rs.1,62,000 ; Insurance paid for import by road Rs.48,000; Cash discount
Rs.33,000; CENVAT Credit refundable Rs.37,000; Payment made to the foreign vendor after a month, on that
date the rate of exchange was $ = 55,20. Compute the landed cost of material.
Illustration 8: Valuation of closing stock of raw materials
Opening stock of raw materials (10,000 units) Rs. 1,80,000; Purchase of Raw Materials (35,000 units) Rs.
7,00,000; Closing Stock of Raw Materials 7,000 units; Freight Inward Rs. 85,000; Self-manufactured packing
material for purchased raw materials only Rs.60,000 (including share of administrative overheads related to
marketing sales Rs. 8,000); Demurrage charges levied by transporter for delay in collection Rs. 11,000; Normal
Loss due to shrinkage 1% of materials ; Abnormal Loss due to absorption of moisture before receipt of materials
100 units.
Illustration 9: ABC Stores is a departmental store, selling goods on retail basis. It makes a gross profit of 20% on
net sales. The following figures for the year-end are available:
Opening Stock Rs. 62,000, Purchases Rs. 4,46,000, Purchase Returns Rs. 12,500, Freight Inwards Rs. 15,000,
Gross Sales Rs. 5,60,000, Sales Returns Rs. 14,000 and Carriage Outwards Rs. 8,000. Calculate the estimated cost
of the Inventory on the closing date. (June 2017)
Illustration 10: The following data relate to the cotton cost of PQR Cotton Mills for January-March, 2017:
(bales are of 180 kg. average) (Amount in Rs. 000)

Opening Stock of Cotton 5000 Bales 44,366
Purchase of Cotton 17500 Bales 1,56,000
Closing Stock of Cotton 3500 Bales
Freight Inwards 595
Demurrage charges to transporter 11
Normal Loss due to moisture loss 1% of material
Find the value of the materials consumed and Closing Stock. (June 2017)
Illustration 11: From the following figures of Systematics Polytex Ltd., compute the landed cost of Egyptian
Cotton for the year 2016-2017:
Particulars Amount
Materials Rs.35,000
Import Duty Rs. 3,35,000

Freight Inward Rs. 1,62,000

Insurance of Import by sea Rs. 48,000
Cash Discount Rs. 33,000
Bank Interest for Import Credit Rs. 15,000
CENVAT Credit refundable Rs. 37,000
Weight Reduction due to Moisture Loss 0.6%
Parity value of US $ :
On the date of Contract Rs. 64.40
On the date of Import Rs. 64.60
On the date of Payment Rs. 65.20 (December 2017)

Practice Questions
Question 1: The particulars relating to the import of Sealing Ring made by B. Gupta & Co. during December,
2014 are given below:
 Sealing Ring - 2,000 pieces invoiced £ 2.00 C.I.F. Mumbai Port.

 Customs duty was paid @ 100% on invoice Value (which has converted to Indian currency by adopting an
exchange rate of Rs. 90.20 per £)
 Clearing charges - Rs.5,000 for the entire consignment, and'
 Freight charges - Rs.3,400 for transporting the consignment from Mumbai Port to factory premises.
It was found on inspection that 100 pieces of the above material were broken and, therefore, rejected. There is no
scrap value for the rejected part. No refund for the broken material would be admissible as per the terms of
contract. The management decided to treat 60 pieces as normal loss and the rest 40 pieces as abnormal loss. The
entire quantity of 900 pieces was issued to production.
Calculate
I. Total cost of material, and

II. Unit cost of material issued to production.
Also state briefly how the value of 100 pieces rejected in inspection will be treated in costs.
Solution:
Computation of total cost of materials

Sealing rings (2000 × 2 × 90.20) Rs.3,60,800
Customs duty 100% of Invoice value Rs.3,60,800
Clearing charges at port Rs.5,000
Freight charges - Port to factory Rs.3,400
Total Cost of materials Rs.7,30,000
Unit cost of material Nos.
Total quantity received 2,000
Less : Normal loss 60
1,940
Less: Abnormal loss 40
Total pieces issued to production 1,900
Total cost of materials Rs.7,30,000
This is to be spread over 1,940 units.
Unit cost of material issued to production (Rs.7,30,000 ÷ 1,940) Rs. 376.2887
Note. The cost of normal loss is to be borne by production during the period and abnormal loss is treated like
good units produced for the purpose of valuation.
Cost to be charged to production (1,900 units × Rs. 376.2887) Rs.7,14,948

Cost to be charged off to P & L A/c (40 units × Rs. 376.2887) Rs.15,052
Rs.7,30,000
Question 2: An advertising agency has received an enquiry for which you are supposed to submit the quotation.
Bill of material prepared by the production department for the job states the following requirement of material:

Paper 10 reams @ Rs. 2,500 per ream
Ink and other printing material Rs. 10,000
Binding material & other consumables Rs. 6,000
Some photography is required for the job. The agency does not have a photographer as an employee. It decides to
hire one by paying Rs.10,000 to him. Estimated job card prepared by production department specifies that service
of following employees will be required for this job:
Artist (Rs. 12,000 per month) 80 hours
Copywriter (Rs. 10,000 per month) 75 hours
Client servicing (Rs. 9,000 per month) 30 hours
The primary packing material will be required to the tune of Rs. 4,000. Production Overheads 40% of direct cost,
while the S & D Overheads are likely to be 25% on Production Cost. The agency expects a profit of 20% on the
quoted price. The agency works 25 days in a month and 6 hours a day.
Solution : Quotation of Printing job
Items Amount Rs. Amount Rs.

Direct material required:
Paper 10 x 2,500 25,000
Ink & other printing material 10,000
Binding material & consumables 6,000
Primary packing material 4,000 45,000
Direct labour spent:
Artist (12,000/(25 x 6)) x 80 6,400
Copy writer (10,000/(25 x 6)) x 75 5,000
Client Servicing (9,000/(25 x 6)) x 30 1,800 13,200
Photographer's charges 10,000
Prime Cost 68,200
Factory Overheads applied @ 40% on Direct Cost 27,280
Production Cost 95,480
S & D overheads applied @ 25% on Production Cost 23,870
Total Cost 119,350
Profit (20% on price i. e. 25% on cost) 29,838
Price to be quoted 1,49,188

CAS 7: Employee Cost (Readwith Guidance Note on CAS 7)
This standard deals with the principles and methods of classification, measurement and assignment of employee
cost for determination of the cost of the product or service, and the presentation and disclosure in cost statements.
Objective: To bring uniformity and consistency in the principles and methods of determining the employee cost
with reasonable accuracy.
Definitions
Employee Cost: Employee Benefits paid or payable in all forms of consideration given for the service rendered by
employees (including temporary, part time and contract employees4) of an entity.
The employees are paid remuneration as per their terms of employment contract.
Overtime Premium: Overtime is the time spent beyond the normal working hours which is usually paid at a higher
rate than the normal time rate. The extra amount beyond the normal wages and salaries paid is called overtime
premium.
Classification of Employee Cost (GN): Employee Cost can be classified on the following two basis -
1) On the basis of tenure
Current Employee Cost (Paid and Payable) Future benefit cost / Termination Benefits
(Provisions created)
Salaries / Wages Gratuity (payable to employees who have
Allowances – DA, HRA completed 5 years of continuous service)
Bonus / incentives Long term compensated absences / leave
Contribution to PF / ESI / any other fund encashment
Employee Welfare expenses Voluntary Retirement Compensation / other
Other benefits like paid holidays, leave with pay deferred employee cost
Short term compensated absences Other retirement / separation benefits
2) On the basis of relation with cost centre / cost object

Direct Employee Cost Indirect Employee Cost
Direct relationship with the product can be All employee cost other than direct employee cost
established in an economically feasible manner Assigned to cost centre on the basis of time booked
The cost may be measured in light of the on a job.
relationship Eg. Workers attending to different equipment in a
sequence. Allocation may be done on the basis of
equipment hours spent
Group Personal/Accident Insurance Policy.
Allocated on the basis of no. of employees in a cost
centre
Principles of measurement
Employee cost would include all the components of labour cost as enunciated in the CAS – 1. Employee cost
should be ascertained taking into account the gross pay including all allowances payable along with the cost to the
employer of all the benefits, including the cost of retirement benefits charged in the financial statements. In case
of companies to which IndAS applies, any re-measurement of such costs recognized in Other comprehensive
income shall not form part of the employee cost.
4
Contract employees include employees directly engaged by the employer on contract basis but does not include
employees of any contractor engaged in the organisation.

Remuneration payable to non-executive directors shall not form part of employee cost but shall form part of
administrative overheads.
Employees cost shall not include compensation paid to the employees for the past period on account of any
dispute / court order.
Short provisions of prior period made up in the current period shall not form part of the employee cost in the
current period.
Employee cost does not include imputed cost.
Cost of idle time = Idle hours X Hourly rate
Normal idle time is to be included in the ascertainment of normal cost. Abnormal idle costs are not treated as part
of cost and are directly charged to costing profit and loss account.
While accounting the employee cost at standard cost, variances due to normal reasons shall be treated as part of
employee cost. Variances due to abnormal reasons shall be treated as part of abnormal cost and not the employee
cost.
Any subsidy, grant, incentive or any such payment received or receivable with respect to any employee cost shall
be reduced from employee cost, in the financial year in which such subsidy or grant or incentive is recognized as
income.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the employee cost.
The costs of perquisites like free housing, free conveyance and any other similar benefits provided to an employee
shall be determined at the total cost of all resources consumed in providing such benefits. Any recovery from the
employees for such benefits shall be reduced from the cost.
Assignment of Cost:
Where the employee services are traceable to a cost object, such employee cost shall be assigned to the cost object
on the basis such as time consumed or number of employees engaged etc. or similar identifiable measure
(Materiality5 considerations should be kept in mind).
Where the employee costs are not directly traceable to the cost object, these may be assigned in a suitable basis
like estimates of time based on time study.
Basis of assignment of certain employee cost are discussed in the below table:
Cost Assignment of Cost

Recruitment cost, training Treated as overheads and dealt with accordingly. Cost incurred in
cost etc. recruitment activities is to be treated as overhead and assigned to the
cost object on appropriate basis, such as number of employee recruited
5
A piece of information is material, if its non-disclosure could influence the decision of the user. The following criteria can
be applied for determining the materiality:
a) The absolute amount – the larger the amount, the more likely that it is material.
b) Comparison of the amount with other similar amounts – the greater the proportion of the considered amount of
say, an expenses versus the total expenses, the more likely it is material.
c) Non-monetary consideration – A small amount representing a significant event / activity may also be considered
material.
d) The cumulative impact of individual items - do they offset one another or do they accumulate in one direction
(increase or decrease)

department wise.
Overtime premium Assigned to the cost object or treated as overhead depending upon
circumstances which led to overtime cost and economic feasibility
Idle time cost Idle Time Cost may be assigned to the cost object or treated as
overheads depending on the economic feasibility and the specific
circumstances causing such idle time. Cost of Idle time for reasons
anticipated like normal lunchtime, holidays etc is normally loaded in
the employee cost while arriving at the cost per hour of an employee/a
group of employees whose time is attributed direct to the cost objects.
(December 2017)
Co-products Co-products are treated as if they are joint products
Separation Cost (related to Separation cost related to voluntary retirement, retrenchment,
voluntary retirement, termination etc. shall be amortised over the period benefitting from
retrenchment, termination such costs. The amortised separation costs for the period shall be
etc.) treated as indirect cost and assigned to the cost objects in an
appropriate manner. (December 2017)
Separation cost (related to Unamortised amount related to discontinued operations, shall not be
discontinued operations) treated as Employee Cost but should be charged to Profit and Loss
account. (December 2017)
Disclosure:
- Employee cost attributable to capital works or jobs in the nature of deferred revenue expenditure
indicating the method followed in determining the cost of such capital work
- Separation Costs payable to employees
- Abnormal cost excluded from employees cost
- Penalties and damages excluded from employee cost
- Subsidy, grant, incentive and any such payment reduced from employee cost
- Employee cost paid to related parties
- Employee cost incurred in foreign exchange
- Any change in the cost accounting principles or methods applied for measurement of and assignment of
the employee cost during the period which has a material effect on the employee cost.
- Disclosure shall be made in the body of cost statement or as a footnote or as a separate schedule only if
material, significant and quantifiable (June 2015)
Illustration 1: How would you treat following cost as per CAS – 7:
a) Separation Costs
b) Idle time cost
c) Recruitment cost
d) Overtime premium
e) Co-product (December 2010)
Illustration 2: Basic pay Rs.5,00,000; Lease rent paid for accommodation provided to an employee Rs.2,00,000,
amount recovered from employee Rs.40,000, Employer’s Contribution to P.F. Rs.75,000, Employee’s
Contribution to P.F. Rs.75,000; Reimbursement of Medical expenses Rs.67,000, Hospitalisation expenses of
employee’s family member borne by the employer Rs.19,000, Festival Bonus Rs.20,000, Festival Advance
Rs.30,000. Compute the Employee cost.

Illustration 3 : Gross pay Rs.10,30,000 (including cost of idle time hours paid to employee Rs.25,000);
Accommodation provided to employee free of cost [this accommodation is owned by employer, depreciation of
accommodation Rs.1,00,000, maintenance charges of the accommodation Rs.90,000, municipal tax paid for this
accommodation Rs.3,000], Employer’s Contribution to P.F. Rs.1,00,000 (including a penalty of Rs.2,000 for
violation of PF rules), Employee’s Contribution to P.F. Rs.75,000. Compute the Employee cost.
Illustration 4: Trial Balance as on 31.3.2013 (relevant extracts only)
Particulars Amount (Rs.) Particulars Amount (Rs.)

Materials consumed 25,00,000
Salaries 15,00,000 Special Subsidy received from 2,75,000
Government towards Employee
salary
Employee Training Cost 2,00,000 Recoverable amount from 35,000
Employee out of perquisites
extended
Perquisites to Employees 4,50,000
Contribution to Gratuity Fund 4,00,000
Lease rent for accommodation 3,00,000
provided to employees
Festival Bonus 50,000
Unamortised amount of 90,000
Employee cost related to a
discontinued operation
(Similar ICWAI Final December 2013 & June 2014)
Illustration 5: Write a brief note on types of Bonus.
Solution: Bonus can be following types:
a) Statutory minimum bonus – Computed as per the provisions of Payment of Bonus Act, 1965 (represents
profit sharing concept introduced in India)
b) Productivity-linked bonus / efficiency related bonus – Bonus not linked to profit but to efficiency of a
particular department / unit / employee which may be based on agreement with the Trade Unions.
c) Incentives – Represents other additional payments like:
- Quality Incentives
- Merit incentives
- Service loyalty incentive
- Extra pay on fulfillment of certain criterion
- Motivational incentives / performance based incentive
- Referral Bonus
Illustration 6: Jayant, an employee of ABC Ltd is engaged in operating fully automatic machinery (feeding
input). Discuss whether his salary cost shall be classified as direct cost or indirect cost.

Solution: As per the Guidance Note on this CAS, in case of the employees engaged in operating fully automatic
machinery, their cost is to be treated as direct cost if they feeding inputs into the machinery. In case they are
engaged in repair and maintenance of machinery, their cost should be classified as indirect.
Jayant is engaged in feeding operation, hence, it is clear that his cost is to be classified as Direct cost
Illustration 7: Harish is an employee of M/s. Prix Co. and gets following emoluments and benefits
(i) Salary Rs. 2,500 per month

(ii) Dearness allowance
On first Rs. 1,000 of salary Rs. 4,000
On next Rs. 1,000 of salary Rs. 1,000
On balance of every Rs. 1,000 Rs. 500 or @ 50% of part thereof
(iii) Employers Contribution to Provident Fund 8% of Salary and D.A.

(iv) Employer’s Contribution to ESI 4% of Salary and D.A.
(v) Bonus 20% of Salary and D.A.
(vi) Other allowance Rs. 2,725 per annum
Harish works for 2400 hours per annum, out of which 400 hours are non-productive but treated as normal idle
time. A worker works for 18 effective hours in job No. 11, where the cost of direct labour is @ effective
hourly cost of Harish and direct material equal to direct labour cost, overhead applied is 100%, of Prime Cost.
The sale value of the job is quoted to earn a profit of 15% on sales. You are requested to find out:
(A) Effectively Hourly cost of Harish, and

(B) The effective sale value of job No. 11. (Final June 2014)
Illustration 8: The following data were extracted from the departmental data of Cost centre where A and B were
employed and performing the job X, Y and Z.
S. No. Particulars A B
1 Basic wages Rs. 150 Rs. 210
2 Dearness allowances 80% 80%
7 Contribution to Provident fund on Basic 10% 10%
3 wages
4 Contribution to E.S.I. on Basic wages 4% 4%
5 Overtime 18 hours Nil
The normal working hours per month is 200 hours. Overtime is paid at double the rate of normal wages and
dearness allowance. Employer’s contribution to Provident fund and E.S.I. are at equal the rate of employee’s
contribution. The two workers are employed on jobs X, Y and Z in the following proportion:
Jobs X Y Z
Worker A 30% 30% 40%
Worker B 20% 30% 50%
Overtime was done by A for job Y. From the above:

(1) Calculate the in-hand earnings of A and B of a month

(2) Calculate the labour rate per hour to the company.
(3) Allocate the labour cost to each job X, Y and Z. (Final December 2014)
Illustration 9: During plant stoppages the direct machine operator of the production floor is being utilised by the
company for cleaning, oiling and other routine jobs of the same plant. Their wages for the period also are treated
as direct wages in cost of production.
Solution: Here operating workers are required to perform certain type of work which falls in the category of
indirect labour like oiling, cleaning maintenance etc. their wages should be treated as indirect wages and
accordingly be included in overhead.
Illustration 10: The extracts of Trial Balance of PANCHAL LTD. a manufacturing company pertaining to
employees as on March 31, 2015 are given below:
Particulars Amount Debit
Salaries Cost 25,45,785
Employees Training Cost 4,73,000
Employees Selection Expenses 2,25,000
Perquisites To Employees 12,45,000
Contribution to Gratuity Fund 5,25,000
Lease rental for accommodation provided to employees 3,25,000
Festival Bonus 1,25,000
Unamortised amount of Employee Cost related to a discontinued operation 1,85,000
Employer’s contribution to P.F. including Penalties Rs. 35,000 2,75,325 Penalties Rs. 35,000 Free
accommodation to own employees Depreciation 1,00,000 Municipal Tax 5,500 Maintenance 45,000 Credit
Special subsidy received from Government towards 1,75,000 employees salary Recoverable amount from
employee out of perquisites extended 35,000. Calculate the Employees cost for the year ended March 31, 2015—
keeping in view of cost Accounting Standard (CAS)-7. (Final June 2015)
Illustration 11: A textile composite mills in the course of modernization issued voluntary retirement notice for 50
workers and the package cost Rs. 144.80 lakhs. This would amount to savings in wages of Rs. 260 lakhs over a
period of 5 years. The package included closing down the Weaving Department. How would you treat separation
cost due to voluntary retirement as per CAS-7 related to Employee Cost? (Final December 2015)
Solution: Cost Accounting Standards-7 (Para-5.4) deals with separation costs of employees due to some
restructuring in the organization. The separation costs related to voluntary retirement, retrenchment termination
etc shall be amortized over the period benefitting from such costs. The amortized separation costs for the period
shall be treated as indirect cost and assigned to cost objects in an appropriate manner. However, unamortized
amount related to discontinued operations shall not be treated as employee cost.
Illustration 12: Find the Employee Cost of a company for the year 2016-17 as per the CAS 7 from the following
figures:

Particulars (Rs. lakh)

Salaries, wages, allowances and bonus 950
Wage award arrears for the previous year 85
Contribution to provident and other funds 188
Employee welfare 56
Abnormal Idle Labour cost due to strike 95
Wages of contractual labour 125
VRS payment for the year 66
(December 2017)
Illustration 13: Reliable Energy Resources Pvt Ltd, has a policy of providing interest free / subsidized short term
and long term loans to its (financially weaker) employees, whose yearly salary is below INR 100,000. The
company incurs / bears substantial interest expenditure on these loans each year. Abhishek Dave, the finance
manager of the Company believes that the interest cost should not form part of employee cost since it is in the
nature of finance charges. You are required to advise the Company on the treatment of interest expenditure
incurred on behalf of its employees.
Solution: As per the provisions of CAS 7, employee cost includes any benefit(s) provided to the employees of the
Company either free of cost or at nominal / subsidized rates. In the instant case, the company provides interest
free / subdised loans to its economically weaker employees. This clearly falls within the ambit of ‘Other benefit’
and, hence, it should be included in Employee cost for the relevant financial year.

CAS 8: Cost of Utilities (Readwith Guidance Note on CAS 8)
This standard deals with the principles and methods of classification, measurement and assignment of cost of
utilities, for determining of the cost of product or service, and the presentation and disclosure in cost statements.
Objective: To bring uniformity and consistency in the principles and methods of determining the cost of utilities
- The standard does not apply to determination of excisable value of captive consumption to which CAS – 4
apply.
- This standard shall not be applicable to the organizations primarily engaged in generation and sale of utilities
Definitions:
Committed cost: The cost of maintaining stand-by utilities shall be the committed cost.
Utilities: Significant inputs such as power, steam, water, compressed air and the like which are used for
manufacturing process but do not form part of the final product.
Stand-by Utilities: Any utility created to safeguard against the failure of the main source of inputs.
Each type of utility shall be treated as a distinct cost object. As each utility is a distinct cost object, cost of each
utility is to be collected and measured separately.
Cost of utilities of various types shall include the components as detailed in the table below:
(December 2011 & June 2014)
Cost of utility purchased - Cost of purchase
- Duties & taxes
- Transportation costs
- Insurance costs
- Other expenditure directly attributable to procurement (net of trade
discounts, rebates, taxes and duties refundable or to be credited)
Cost of self generated utility - Direct material cost,
for own consumption - direct employee cost,
- direct expenses, and
- factory overheads
Cost of utility generated for - Cost of self generated utility and
the inter unit transfer - distribution cost incurred for such transfers
Cost of utility generated for - Direct material cost,
the inter company (related - direct employee cost,
party) transfer - direct expenses,
- factory overheads,
- distribution cost and
- share of administrative overheads
Cost of Utilities generated for - Direct material cost,
the sale to outside parties - direct employee cost,
- direct expenses,
- factory overheads,
- distribution cost,
- share of administrative and

- marketing overheads
Inter-utility transfer
There may inter–utility transfer cost. For example water utility may be used in generation of steam and power.
Power may be required for pumping water from tubewell.
Inter-utility cost is to be determined by the following method:
a) repeated distribution method;
b) matrix algebra / simultaneous equation method through computer application
Principles of measurement of cost of Utilities
- Finance costs incurred in connection with the utilities shall not form part of cost of utilities.
- The cost of utilities shall include the cost of distribution of such utilities. The cost of distribution will consist
of the cost of delivery of utilities up to the point of consumption.
- Cost of utilities shall not include imputed costs.
- Where cost of utilities is accounted at standard cost, the price variances related to utilities shall be treated as
part of cost of utilities and the portion of usage variances due to normal reasons shall be treated as part of
cost of utilities. Usage variances due to abnormal reasons shall be treated as part of abnormal cost.
- Subsidy/Grant/Incentive or any such payment received/receivable with respect to any cost of utilities shall be
reduced from the cost in the financial year in which such subsidy or grant or incentive is recognized as
income.
- The cost of production and distribution of utilities shall be determined based on the normal capacity or actual
capacity utilization whichever is higher and unabsorbed cost, if any, shall be treated as abnormal cost.
- Cost of a Stand-by Utility shall include the committed costs of maintaining such a utility. All related cost of
the standby utility is to be absorbed irrespective of its level of utilization.
- Any abnormal cost where it is material and quantifiable shall not form part of the cost of utilities.
- Penalties, damages paid to statutory authorities or other third parties shall not form part of the cost of
utilities.
- Credits/recoveries relating to the utilities including cost of utilities provided to outside parties, material and
quantifiable, shall be deducted from the total cost of utility to arrive at the net cost of utility
Sub-set of a Utility
A given utility may have more than one distinct utilities. For example supplier of electricity may be providing
electricity at 11 KVA and thereafter it is converted to 460 V and given to different users. One of such user may
employ step down process and bring the voltage level to 230 V.
Depending upon the relevancy, the electricity in this case may be treated as two distinct utilities vz. 460 V(High
Voltage) and 230 V (Low voltage) electricity, if there is variation in supply rate. This is known as sub-set of
utility and it is important to select appropriate sub sets of a given utility considering the special feature of a sub-
set.
Different utilities may have different measurement unit considering its nature and cost. Some examples are as
under:
Utility Measure Unit

Power Units per hour KWH or MWH
Steam Kg per tonne KG/ Cm2 at --- oC

- Low heat steam

- High heat steam
Water Volume Ltrs/K.Ltrs
- Chilled water
- Treated water
- Demineralised water
Heating Thermal unit K cal or BTU
Air – Compressed air Pressure volume M3
Assignment of costs
Traceability to a cost objective in an economically feasible manner is the guiding principle for assigning the cost
of utilities. The meter installed for recording consumption of utility is the right source of traceability of cost of
utility for a cost object. If no meters are provided, the cost of utilities is to be assigned on the basis of rated
capacity, wattage, horse power of machines, area volume or on technical assessment.
Where the cost of utilities is not directly traceable to cost object, it shall be assigned on the most appropriate
basis. The most appropriate basis of distribution of cost of a utility to the departments consuming services is to be
derived from usage parameters.
Disclosures:
- The basis of distribution of Cost of Utility to the consuming centres.

- The cost of purchase, production, distribution, marketing and price with reference to sales to outside
parties.
- Where cost of utilities is disclosed at standard cost, the price and usage variances.
- The cost and price of Utility received from/supplied to related parties
- The cost and price of Utility received from/supplied as inter unit transfers and inter-company transfers
- Cost of utilities incurred in foreign exchange.
- Any Subsidy/Grant/Incentive and any such payment reduced from Cost of utilities.
- Credits/recoveries relating to the Cost of utilities.
- Any abnormal cost excluded from Cost of utilities.
- Penalties and damages paid etc excluded from cost of utilities
the Cost of utilities during the period covered by the cost statement which has a material effect on the
Cost of utilities.
- Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule if
material, significant and quantifiable
(December 2013)
Illustration 1: SUNFLAG SUGAR MILLS LTD. located at Maharashtra has a boiler used for its own by-
product, Bagasse as fuel for generating steam. The high pressure steam generated is first used for generation of
power and the exhaust steam is used in the process of sugar manufacture. The following details are extracted from
the Financial Accounts and Cost Accounting records of the Company for the year ended 31st March, 2015.
Steam
Particulars Boiler Turbine
High pressure steam Generated 34,780 M.T.
2,540,000
Power generated KWH
Cost Rs. Rs.
Water 10,48,170 ---
Fuel (Bagasse) 9,21,43,460 ---

Stores and Chemicals 2,57,070 65,695

Salaries and Wages 29,58,250 7,32,900
Repair and Maintenance 65,64,200 2,57,700
Depreciation 17,24,700 6,49,600
Other Expenses 39,93,600 1,20,700
Note: To Calculate Cost of Power generated, credit for exhaust steam to be taken as 80% of Cost of steam. You
are required to prepare two separate cost sheets for steam and power as per the companies (Cost Records and
Audit) Rules 2014 for the year ended 31st March, 2015. (December 2015)
Illustration 2: A unit generates bio-gas out of the waste of industrial alcohol. The unit generates power from
diesel oil and, in addition, the said bio-gas so generated is used as a fuel in generating steam for power. The high
pressure steam is first sent to the STEAM TURBINE and the exhaust steam is used in the process of
manufacturing alcohol. The following details are extracted from the financial accounts and the cost accounting
records of the unit for the year ending 31.03.2017:
Particulars Boiler (Rs.) Steam Turbine (Rs.)

Cost of Water 13,10,000
Fuel Oil 11,50,05,800
Bio-gas Plant expenses 3,20,60,500
Stores and Chemicals 3,10,000 79,200
Salaries and Wages 37,10,000 8,79,600
Repairs and Maintenance 75,15,400 3,09,600
Depreciation 21,56,250 7,80,000
Other expenses 48,95,500 1,45,200
High Pressure Steam generated (mt.) 43,690
Power generated (kWh.) 30,60,500
Note: The fall in the Enthalpy value of the steam is 8%. Prepare two separate cost sheets for steam and power as
per the Companies (Cost Records and Audit) Rules, 2014 for the year ended March 31, 2017. (December 2017)
Illustration 3: X ltd is having a business of generating Thermal Electricity. The company raises water from a lake
nearby. The Water Collection Cost consists of water collected from lake and primary treatment. Thereafter the
Water is transferred to Water Treatment Cost Centre for secondary treatment. The treatment water is further
transferred to Water Demineralization Cost Centre for power generation and to the Township for domestic use.
Following information is provided for the respective cost centres.
Particulars Cost centres

UOM Water collection Water treatment De-mineralisation Township
Quantity of water raised / KL 4,00,000 3,80,000 2,60,000 1,00,000
received
Quantity Transferred KL 3,80,000 3,60,000 2,55,000 -
Cost of Water raised Rs. 4,00,000 - - -
Chemicals Rs. 80,000 2,50,000 3,00,000 -
Salary Rs. 3,00,000 2,50,000 3,00,000
Insurance Rs. 50,000 40,000 50,000 -
Depreciation Rs. 24,000 30,000 40,000 -
Repairs & Maintenance Rs. 30,000 40,000 50,000 -
Total 8,84,000 6,10,000 7,40,000 -

Information about water quantity raised and lost in transfer.
Cost centres Quantity (KL)

Actual Normal
From Water Collection to Water Treatment 20,000 15,000
From Water Treatment to De-mineralization 20,000 17,000
From Water treatment to Township - -
From De-mineralization to Power Generation 5,000 5,000
Total Loss 45,000 37,000
Quantity of water utilized 3,55,000 -
Total water Raised 4,00,000 -
1. Calculate the Cost of Water transferred from Water De-mineralization plant to Power Generation.
2. Calculate the total value of abnormal loss of water.

CAS – 9: Packing Material Cost (Readwith guidance note on CAS 9)
This standard deals with the principles and methods of classification, measurement and assignment of Packing
Material Cost, for determination of the cost of product, and the presentation and disclosure in cost statements.
Packing Materials for the purpose of this standard are classified into primary and secondary packing materials.
Objective: To bring uniformity and consistency in the principles and methods of determining the packing
material cost with reasonable accuracy
The standard does not apply to determination of excisable value of captive consumption to which CAS-4 apply.
Definitions
Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. This will include
interest and commitment charges on bank borrowings, other short term and long term borrowings etc.
Packing Materials: Materials used to

- hold,
- identify,
- describe,
- store,
- protect,
- display,
- transport,
- promote,
- make the product marketable and
- communicate with the consumer. (June 2017)
Defectives: Packing materials that do not meet quality standards. This may include reworks or rejects.
Reworks: Defectives which can be brought up to the standards by putting in additional resources. Rework
includes repairs, reconditioning and refurbishing.
Rejects: Defectives which cannot meet the quality standards even after putting in additional resources. Rejects
may be disposed off as waste or sold for salvage value or recycled in the production process.
Packing Material Cost: The cost of material of any nature used for the purpose of packing of a product.
Primary Packing Material: Packing material which is essential to hold the product and bring it to a condition in
which it can be used by or sold to a customer. It keeps the contents of clean fresh and sterile. Eg. Blister strips for
tablets and capsules. (June 2017)
Reusable Packing Material: Packing materials that are used more than once to pack the product.
Scrap: Discarded packing material having some value in a few cases and which is usually either disposed of
without further treatment or reintroduced into the production of packing material.
Secondary Packing Material: Packing material that enables to store, transport, inform the customer, promote and
otherwise make the product marketable. Facilitates in loading and unloading / storage. Eg. Wooden pallets, board,
plastic wrapping etc. (June 2017)
Packing Material Development Cost: Cost of evaluation of packing material such as pilot test, field test,
consumer research, feedback, and final evaluation cost.

Benefits of Packaging:-
- Physical protection – From temperature, vibration, shock, compression etc.
- Barrier Protection – From Oxygen, Water, Dust, Vaporisation
- Containment / Agglomeration – To induce efficiency in transportation, small objects are grouped into
bigger packages
- Information transmission – To the consumers on how to use, how to dispose off and Ingredients
- Marketing – To encourage the potential buyer to purchase the product
- Security – reducing security risks of shipment
- Convenience – In distribution, handling, stocking, display etc.
- Portion control – To suit the needs of households, bulk products (like salt) are packed in smaller
quantities
Classification of Packing material cost:-
On the basis of Source of Supply – a) Self Manufactured; and b) Purchased (Imported as well as indigenous)
On the basis of Use – a) Primary packaging; and b) Secondary packaging
Principles of measurement of packing material cost
Packing material cost which is purchased should include:

- purchase price including duties and taxes
- freight inwards,
- insurance, and
- other expenditure directly attributable to procurement (net of trade discounts, rebates, taxes and duties
refundable or to be credited) that can be quantified at the time of acquisition
- Finance costs directly incurred in connection with the acquisition of packing material shall not form part of
Packing Material Cost.
Self manufactured packing materials cost should include: (ICWAI Final June 2012, December 2013)
- direct material cost,

- direct employee cost,
- direct expenses,
- job charges,
- factory overheads including share of administrative overheads comprising factory management and
administration and share of research and
- development cost incurred for development and improvement of existing process or product.
Normal loss or spoilage of packing material prior to receipt in the factory shall be absorbed in the cost of balance
materials net of amounts recoverable from suppliers, insurers, carriers or recoveries from disposal.
Any demurrage, detention charges or penalty levied by the transport agency or any authority shall not form part of
the cost of packing materials.
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to packing material shall be
reduced for ascertainment of the cost to which such amounts are related
Principle of valuation of issue of packing material

Issues of packing materials shall be valued using appropriate method as per the provisions contained in
accounting standards for the time being in force. The method of valuation shall be followed on a consistent basis.
Wherever, packing material costs include transportation costs, determination of costs of transportation shall be
governed by CAS 5 – Cost Accounting Standard on determination of average (equalized) cost of transportation
Packing Material Costs shall not include imputed costs.
Where packing materials are accounted at standard cost, the price variances related to such materials shall be
treated as part of packing material cost and the portion of usage variances due to normal reasons shall be treated
as part of packing material cost. Usage variances due to abnormal reasons shall be treated as part of abnormal
cost.
The normal loss arising from the issue or consumption of packing materials shall be included in the packing
materials cost.
Any abnormal cost where it is material and quantifiable shall be excluded from the packing material cost.
The credits/recoveries in the nature of normal scrap arising from packing materials if any, should be deducted
from the total cost of packing materials to arrive at the net cost of packing materials.
Some miscellaneous points on valuing the imported material (GN on CAS 9):-
- Two methods may be used for valuing the imported material – a) Free On Board (FOB) where purchaser /
buyer will pay insurance / freight; and b) Cost Insurance Freight (CIF) where seller pays insurance /
freight
- Actual custom paid on the basis of classification by the customs authorities will be assigned, net of any
credits. Higher duty paid under protest will not be included in cost if there is reasonable expectation that
the entity will satisfy the conditions for the excess duty to be refunded.
- Packing material imported free of duty or at concessional rate (under export incentive scheme) will be
accounted for at the actual rate of duty applicable so long as there is a reasonable expectation that the
entity will satisfy the conditions for the duty exempted or concession.
- Harbor Dues, stevedoring charges (loading / unloading of cargo), congestion charges, and the like are to
be added to the cost of packing material, on the basis of actual.
- In case packing material is imported as a basket, then the cost is to be apportioned on a suitable basis like
weight, volume, or value.
- Charges incurred on intermediate storage are to be included in cost
- Commission agent charges, Letter of Credit (LC) Charges will added to the cost
- Bank Charges which are in the nature of borrowing cost or administrative overheads will not form part of
- Handling cost incurred upto works / factory gate shall be treated as follows:
a) Handling Cost specific to one packing material – Assigned to the specific packing material
b) Handling is done by own employees – Cost to be treated as procurement overheads and not packing
material cost
c) Handling cost is carrier’s responsibility – No assignable cost
- Incoming Inspection Cost – Shall be treated as follows:
a) Done by a third party – Specific cost to be assigned to the packing material inspected.
b) Done internally with own employees – To be treated as procurement overheads and not included in
The forex component of imported packing material cost shall be converted at the rate on the date of the
transaction. Any subsequent change in the exchange rate till payment or otherwise shall not form part of the

packing material cost. The date on which a transaction (whether for goods or services) is recognised in
accounting in conformity with generally accepted accounting principles.
(June 2012, December 2013)
Assignment of Cost (June 2012 & 2017, December 2013)
Packing material costs shall be directly traced to a cost object to the extent it is economically feasible.
Where the packing material costs are not directly traceable to the cost object, these may be assigned on the basis
of quantity consumed or similar measures like technical estimates.
The packing material cost of reusable packing shall be assigned to the cost object taking into account the number
of times or the period over which it is expected to be reused.
Cost of primary packing materials shall form part of the cost of production. Cost of secondary packing materials
shall form part of distribution overheads.
Disclosures
1. The basis of valuation of Packing Materials.
2. Where Packing Materials Cost is disclosed at standard cost, the price and usage variances.
3. The cost and price of Packing Materials received from/supplied to related parties.
4. Packing Materials cost incurred in foreign exchange.
5. Any Subsidy/Grant/Incentive and any such payment reduced from Packing Materials Costs.
6. Credits/recoveries relating to the Packing Materials Costs.
7. Any abnormal cost excluded from Packing Materials Costs.
8. Penalties and damages paid etc. excluded from Packing Materials Costs.
9. Any change in the cost accounting principles and methods applied for the measurement and assignment of the
Packing Materials Costs during the period covered by the cost statement which has a material effect on the
Packing Materials Cost shall be disclosed.
10. Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule if
Illustration 1: State whether the gunni bags (used for storing cement/fertilizers/sugar) cost is primary or
secondary and whether the same is to be treated as cost of production or distribution overhead.
Solution: Packaging Cost of products such as Cement which do not need any further packaging except for a bag,
shall be treated as primary packaging and the same shall be included in cost of production.

CAS – 10: Direct expenses (Readwith the guidance note on CAS-10)
This standard deals with the principles and methods of classification, measurement and assignment of Direct
Expenses, for determination of the cost of product or service, and the presentation and disclosure in cost
statements.
Objective
To bring uniformity and consistency in the principles and methods of determining the Direct Expenses with
reasonable accuracy.
Direct Expenses – Expenses relating to manufacture of a product or rendering a service, which can be identified
or linked with the cost object other than direct material cost and direct labour cost. E.g. royalties charged on
production, hire charges for use of specific equipment for a specific product, cost of special designs or drawings
for a job, software services specifically required for a product, travelling expenses for a specific product.
(December 2013, June 2015)
Principles of Measurement / Identification of Direct Expenses: (December 2013, June 2015)
Identification of Direct Expenses shall be based on traceability in an economically feasible manner.
Type of Direct Expense Principle of measurement of Cost

Direct expenses incurred for the Cost shall be determined at invoice or agreed price including duties and taxes,
use of bought out resources and other expenditure directly attributable thereto net of trade discounts,
rebates, taxes and duties refundable or to be credited
Other direct expenses (incurred Cost shall be determined on the basis of amount incurred in connection
in-house) therewith
In the case of research and development cost, the amount traceable to the cost object for development and
improvement of the process for the existing product shall be included in Direct Expenses.
Direct Expenses paid or incurred in lump-sum or which are in the nature of ‘one – time’ payment, shall be
amortised on the basis of the estimated output or benefit to be derived from such direct expenses.
Examples: Royalty or Technical know-how fees, or drawing designing fees, are paid for which the benefit is
ensued in the future period. In such case, the production / service volumes shall be estimated for the effective
period and based on volume achieved during the Cost Accounting period, the charge for amortisation be
determined.
If an item of Direct Expenses does not meet the test of materiality, it can be treated as part of overheads.
(June 2015)
Finance costs incurred in connection with the self generated or procured resources shall not form part of Direct
Expenses. Also direct expenses shall not include imputed costs. In case of goods produced for captive
consumption, treatment of imputed cost shall be in accordance with Cost Accounting Standard – 4 (CAS-4).
Where direct expenses are accounted at standard cost, variances due to normal reasons shall be treated as part of
the Direct Expenses. Variances due to abnormal reasons shall not form part of the Direct Expenses.
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to any Direct Expenses shall
be reduced for ascertainment of the cost of the cost object in the year in which the income is recognised.
Any abnormal portion of the direct expenses where it is material and quantifiable shall not form part of the Direct
Expenses.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the Direct Expenses.

Credits/ recoveries relating to the Direct Expenses, material and quantifiable, shall be deducted to arrive at the net
Direct Expenses
Assignment of costs
Direct Expenses that are directly traceable to the cost object shall be assigned to that cost object
Disclosures
1. The basis of distribution of Direct Expenses to the cost objects/ cost units.
2. Quantity and rates of items of Direct Expenses, as applicable.
3. Where Direct Expenses are accounted at standard cost, the price and usage variances.
4. Direct expenses representing procurement of resources and expenses incurred in connection with resources
generated.
5. Direct Expenses paid/ payable to related parties9.
6. Direct Expenses incurred in foreign exchange.
7. Any Subsidy/Grant/Incentive and any such payment reduced from Direct Expenses.
8. Credits/recoveries relating to the Direct Expenses.
9. Any abnormal portion of the Direct Expenses.
10. Penalties and damages excluded from the Direct Expenses
Packing Materials Costs during the period covered by the cost statement which has a material effect on the
Packing Materials Cost shall be disclosed.
Practice Question
Illustration 1: TROMA LTD., a manufacturing unit, produces two products PB and PS. The following
information is extracted from the Books of the Company for the year ended March 31, 2016:
Particulars Product PB Product PS

Units Produced (Qty.) 2,10,000 1,68,000
Units sold (Qty.) 1,68,000 1,36,500
Machine hours utilized 1,26,000 84,000
Design charges (Rs.) 1,57,500 1,89,000
Software development 2,62,500 3,78,000
charges (Rs.)
(i) Royalty paid on sales Rs.6,09,000 [@ Rs. 2 per unit sold for both the products].
(ii) Royalty paid on units produced Rs.3,78,000 [@ Rs.1 per unit produced for both the products].
(iii) Hire charges of equipment used in the manufacturing process of product PB only Rs.53,000.

Note: No adjustments are to be made related to units held i.e. Closing Stock. You are required to compute the
DIRECT EXPENSES—keeping in view of Cost Accounting Standard (CAS)-10.
Solution: TROMA LTD. Computation of Direct Expenses (As per CAS – 10) (Amount in Rs.)
Particulars Product PB Product PS

Royalty paid on sale 336,000 273,000
Add: Royalty paid on units produced 210,000 168,000
Add: Hire charges of equipment used in the

manufacturing process of product-PB only 53,000 --------
Add: Design charges 157,500 189,000
Add: Software development charges related to

production 262500 378,000
Direct expenses (total) 1,019,000 1,008,000
Illustration 2: As a part of management strategy SEA SENA LTD. Manufacturing soaps, purchased a popular
soap brand ― SUNFLOWER from a smaller company. What will be treatment of such costs in the Cost
Statements as per relevant Cost Accounting Standard?
Solution: The expenses paid or incurred for purchase of a brand is lump-sum in nature and purchased for the
increase in revenue income over a long period of time. As per Cost Accounting Standard 10, expenses which are
in the nature of ‘one-time’ payment, shall be amortized on the basis of the estimated output or benefit to be
derived from such direct expenses. The expenses for which the benefit is ensued in the future period shall be
equated with the estimated production/service volumes for the effective period and based on volume achieved
during the Cost Accounting period. Accordingly, the charge for amortization shall be determined. In the given
situation, the company is likely to be benefitted from the brand image of the product and the costs so amortized be
treated as Selling Expenses over the estimated life of the brand image.
Practice Questions
Question 1: A manufacturing unit produces two products ‘A’ and ‘B’. The following information is furnished:
Particulars Product A Product B

Units produced (Qty) 25,000 20,000
Units Sold (Qty) 20,000 17,000
Machine Hours utilised 10,000 5,000
Design charges 15,000 18,000
Software development charges 24,000 36,000
Royalty paid on sales Rs.1,11,000 [@ Rs.3 per unit sold, for both the products]; Royalty paid on units produced
Rs.45,000 [@Rs.1 per unit purchased, for both the products], Hire charges of equipment used in manufacturing
process of Product ‘A’ only Rs.5,000, Compute the Direct Expenses
Solution: Computation of Direct Expenses
Particulars Product A Product B

Royalty paid on Sales 60,000 51,000
Add Royalty paid on units produced 25,000 20,000
Hire charges of equipment used in manufacturing process of Product

Add X only 5,000 ----
Add Design Charges 15,000 18,000
Add Software development charges related to production 24,000 36,000
Direct Expenses 1,29,000 1,25,000
Note: (a) Royalty on production and royalty on sales are allocated on the basis of units produced and units sold
respectively. These are directly identifiable and traceable to the number of units produced and units sold. Hence,
this is not an apportionment.
(b) No adjustments are made related to units held, i.e. closing stock.

CAS – 11: Administrative Overheads
This standard deals with the principles and methods of classification, measurement and assignment of
administrative overheads, for determination of the cost of product or service, and the presentation and disclosure
in cost statements
Objective
To bring uniformity and consistency in the principles and methods of determining the administrative overheads
Administrative overheads shall be the aggregate of cost of resources consumed in activities relating to general
management and administration of an organization. It usually represents the cost of shared services, cost of
infrastructure and general management costs. Administrative overheads comprise items like employee costs,
utilities, office supplies, legal expenses and outside services. Cost may be ascertained using the following
principles:
Type of Administrative Expense Principle of measurement of Cost

Administrative services procured from outside Cost shall be determined at invoice or agreed price including
duties and taxes including other expenditure directly
attributable thereto net of discounts, taxes and duties
refundable or to be credited.
In case of leased assets - Operating Lease Entire rentals shall be included in the administrative
(June 2013 & December 2015) overheads
In case of leased assets - Finance Lease6 Finance cost portion shall be segregated and treated as a part
of finance costs and the principal cost component of the asset
(June 2013, December 2014 & 2015) is to be treated as Administrative Overheads.
Cost of software (purchased or developed) Cost shall be amortised over its estimated useful life
including up-gradation cost
(June 2013 & December 2015)
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to administrative overheads
shall be reduced from the cost in the period in which it is recognized as income.
Credits/ recoveries relating to the Direct Expenses, material and quantifiable, shall be deducted to arrive at the net
Direct Expenses
Any abnormal cost should be reduced from the administrative cost.
Fines, penalties, damages paid to statutory authorities or other third parties shall not form part of the
Administrative Overhead.
Any change in the cost accounting principles applied for the measurement of the administrative overheads should
be made only if it is required by law or for compliance with the requirements of a cost accounting standard or a
change or a change would result in a more appropriate preparation or presentation of cost statements of an
organization.
6
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. It is also
referred to as disguised purchase.

Assignment of cost
Traceability to a cost object in an economically feasible manner is the guiding principle. The assignment shall be
based on either of following two principles:
a) Cause and effect – Cause is the process or operation or activity and effect is the incurrence of cost
b) Benefits received – Overheads are to be apportioned to the various cost objects in proportion to the
benefits received by them.
The cost of shared services should be assigned to user activities on the basis of actual usage.
(December 2012 & 2014)
Where the resources by way of infrastructure are shared the cost should be assigned on a readiness to serve basis.
General management cost should be assigned on rational basis. Like number of employees, turnover etc.
Disclosures
1. The basis of assignment of administrative overhead to the cost objects/ cost units.
2. Any imputed cost included as a part of administrative overheads
3. Administrative overhead incurred in foreign exchange.
4. Any Subsidy/Grant/Incentive and any such payment reduced from administrative overhead.
5. Credits/recoveries relating to the administrative overhead.
6. Any abnormal portion of the administrative overhead.
10. Penalties and damages excluded from the administrative overhead
administrative overhead during the period covered by the cost statement which has a material effect on the
administrative overhead shall be disclosed. Where the effect of such change is not ascertainable wholly or partly
the fact shall be indicated
Practice Questions
Illustration 1: A company acquired a Diesel Generating Set (500 KVA) to cater the shortfall of power supply
from the grid. The DG Set was on lease and the annual payout was Rs. 1,25,000 toe the leasing company. How
the cost will be treated in the cost accounts? Will the company required to maintain records for captive power
generation? (December 2015)
Solution: Cost Accounting Standards 11 issued by the Institute of Cost Accountants of India deals with
Administrative Overheads. In case of Finance lease, the element of finance cost in the lease rental should be
segregated and shown as Finance Costs and the principal cost portion should be taken to administrative
overheads. In case of Operating Lease, the entire lease rental should be included in Administrative Overhead.

In case of a company whose product(s)/service (s) are covered under the Rules and it consumes electricity from
the captive generating plant, determination of cost of generation, transmission, distribution and supply of
electricity as per CRA-1 would be mandatory since the cost of consumption of electricity has to be at cost. Hence,
maintenance of cost records for generation, transmission, distribution and supply of electricity would be
applicable. However, cost audit will not be applicable to such captive plants, provided the entire generation is
consumed captively and no portion is sold outside.

CAS – 12: Repairs and maintenance (Readwith guidance note on CAS – 12)
This standard deals with the principles and methods of classification, measurement and assignment of repair and
maintenance expenses, for determination of the cost of product or service, and the presentation and disclosure in
cost statements
Objective
To bring uniformity and consistency in the principles and methods of determining the repair and maintenance
expenses with reasonable accuracy.
Definitions
Repair and maintenance cost: Cost of all activities which have the objective of maintaining or restoring an asset
/ equipment in or to a state in which it can perform its required function at intended capacity and efficiency.
Repair and maintenance activities for the purpose of this standard include routine or preventive maintenance,
planned maintenance and breakdown maintenance. The repair or overhaul of an asset which results in restoration
of the asset to intended / original condition would also be a part of Repair and maintenance activity.
Major overhaul is a periodic (generally more than one year) repair work carried out to substantially restore the
asset to intended working condition.
Classification of repairs and maintenance (R&M) activities
By nature:-
- Preventive or routine or planned maintenance7

- Corrective Maintenance8
- Total Productive Maintenance (TPM) TPM
- Break down
By size:
- Minor repair
- Major repair/ Overhaul
By class of asset:
- Building repair (factory building, Administrative Building, boundary wall repair)

- Machinery repair ( boiler repair, turbine repair, etc)
- Furniture and fixture repair
- vehicle repair
- Computer repair
By workshop type:
- Mechanical Repairs and Maintenance (repair carried out by Mechanical Workshop for machine repairs)
- Electrical Repairs and Maintenance ( electrical repair carried out by Electrical Deptt for electrical fitting)
7
Maintenance of equipment or systems before fault occurs. It is carried out to keep equipment working. Eg. oil changes,
lubrication etc. This includes planned maintenance of machinery / equipment which requires overhauling, owing to its
condition.
8
Corrective maintenance is designed to preserve and restore equipment reliability by replacing worn out components
before they actually fail. This activity may consist of repairing, restoration or replacement of components

- Civil Repairs and Maintenance (repair of building by Civil Works Deptt)

- Instrumentation Repairs and Maintenance.
Repair and maintenance cost is aggregate of direct and indirect cost which is related to the repair and maintenance
activity like Cost of materials, Consumable stores, Spares, manpower, equipment usage, utilities and other
identified resources consumed in such activity. Following elements must be included while computing the cost of
repair and maintenance:
Particulars Elements
Cost of in-house repairs and - Cost of materials
maintenance activities - Consumable stores
- Spares
- Manpower
- Equipment usage
- Utilities
- Other resources used in such activity
Cost of repairs and maintenance - Charges payable to the contractor, eg, Annual
activity carried out by outside maintenance contracts (AMC)
contractors inside the entity - Cost of materials
- Consumable stores
- Spares
- Manpower
- Equipment usage
- Utilities
- Other resources used in such activity
Cost of repairs and maintenance - Invoice / agreed price including duties and taxes
activity carried out by contractors - Other expenditure directly attributable thereto net of
at its premises discounts, taxes and duties refundable or to be credited
- Eg. it may involve costs of travel of technicians besides
bill for services from the agency rendering the services.
Cost of spares replaced which do not enhance the future economic benefits from the existing assets beyond its
previously assessed standard of performance shall be included under repairs and maintenance cost.
High value spare when replaced by a new spare and is reconditioned, shall be recognized as PPE when they meet
the definition of PPE and depreciated accordingly. Otherwise such item are classified as Inventory and recognized
in cost as and when they are consumed. (June 2018)
Example: A company purchased equipment for Rs. 10 crore and insurance spare for Rs. 1 crore. If the company
is covered under IndAS, such spare is capitalized as Property, Plant & Equipment. After use for five years, the
equipment broke down and a part was replaced with the aforesaid insurance spare. After five years, the
depreciated value of equipment is Rs. 5 crore. As property, plant and equipment are depreciated when they are
available for use, accordingly the depreciated value of new spare is Rs. 50 lakhs.
The old spare was reconditioned and the cost of reconditioning is Rs. 10 lakh. As per estimated life of the old
spare for future economic benefits, the current market value of the reconditioned old spare has been estimated at
Rs. 25 lakhs. The amount to be treated in repairs and maintenance is Rs. 35 lakhs as follows:

Rs. In Crore
A. Equipment Cost 10.00
B. Cost of New Spare 1.00
Total Cost (A+B) 11.00
Depreciation for 5 years 5.50
Depreciated value of Equipment & Spare 5.50
Reconditioning cost of old Spare 0.10
Depreciated Value of old Spare 0.50
Book Value of Reconditioned spare 0.60
Current market value of reconditioned
spare to be restated in Book of Account 0.25
Amount to be treated in Repairs and Maintenance 0.35
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to repairs and maintenance
cost shall be reduced for ascertainment of the cost to which such amounts are related.
Any abnormal cost should be reduced from the repair and maintenance cost. Eg. Any repair and maintenance cost
resulting from some abnormal circumstances, namely major fire, explosions, floods and similar events if any shall
not form part of the repair and maintenance cost. (June 2012)
Credits/recoveries relating to the repair and maintenance activity, material and quantifiable, shall be deducted to
arrive at the net repairs and maintenance cost.
Any change in the cost accounting principles applied for the measurement of the administrative overheads should
be made only if it is required by law or for compliance with the requirements of a cost accounting standard or a
change or a change would result in a more appropriate preparation or presentation of cost statements of an
organization.
Assignment of Costs
Shall be traced to a cost object to the extent economically feasible. The assignment shall be based on either of
following two principles:
a) Cause and effect – Cause is the process or operation or activity and effect is the incurrence of cost
b) Benefits received – Overheads are to be apportioned to the various cost objects in proportion to the
Disclosures
1. The basis of assignment of repairs and maintenance cost to the cost objects / cost units.
2. When standard cost is applied in repairs and maintenance cost, the price and usage variances.
3. Repairs and maintenance cost of Jobs done in-house and outsourced separately.
4. Cost of major overhauls, asset category wise and the basics of amortization.
5. Repairs and maintenance cost paid / payable to related parties.
6. Repairs and maintenance cost incurred in foreign exchange.

7. Any subsidy / grant / incentive or any amount of similar nature received / receivable reduced from
repairs and maintenance cost
8. Any credits / recoveries relating to the repair and maintenance cost.
9. Any abnormal portion of the repairs and maintenance cost.
10. Penalties and damages excluded from the administrative overhead
11. Any change in the cost accounting principles and methods applied for the measurement and
assignment of the administrative overhead during the period covered by the cost statement which has
a material effect on the administrative overhead shall be disclosed. Where the effect of such change is
not ascertainable wholly or partly the fact shall be indicated
12. Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule
if material, significant and quantifiable

CAS 13 - Cost of Service Cost Centre (Readwith guidance note on CAS – 13)
This standard deals with the principles and methods of determining the cost of Service Cost Centre. It excludes
Utilities and Repairs & Maintenance Services dealt with in CAS-8 and CAS-12 respectively.
Objective
The objective of this standard is to bring uniformity and consistency in the principles and methods of determining
the Cost of Service Cost Centre with reasonable accuracy.
Definitions
Administrative Overheads: Cost of all activities relating to general management and administration of an
organization
Distribution Overheads: Distribution Overheads, also known as Distribution Cost, are the costs incurred in
handling a product / service from the time it is ready for dispatch until it reaches the ultimate consumer including
the units receiving the product / service in an inter-unit transfer.
Finance Costs: Costs incurred by an enterprise in connection with the borrowing of funds. This will include
interest and commitment charges on bank borrowings, other short term and long term borrowings.
Stand-by service: Any facility created as backup against any failure of the main source of service.
Support-Service Cost Centre: The cost centre which primarily provides auxiliary services across the enterprise.
The cost centre which provides services to Production, Operation or other Service Cost Centre but not directly
engaged in manufacturing process or operation is a service cost centre. Eg. Research & Development, Pollution
Control, Human Resources (HR), Finance, Internal Audit, Sales, Marketing, Canteen, Security Services etc.
(December 2011)
Administrative Overheads include cost of administrative Service Cost Centre
Principles of Measurement
Each identifiable service cost centre shall be treated as a distinct cost object for measurement of the cost of
services subject to the principle of materiality. Cost of service cost centre shall be the aggregate of direct and
indirect cost attributable to services being rendered by such cost centre.
Particulars Elements
Cost of in-house services - Material consumed – direct and indirect,
(December 2011) - consumable stores and spares,
- manpower engaged in in-house services,
- equipment usage - depreciation and amortization of fixed
assets identified with a service cost centre,
- utilities consumed – power, water, coal etc.; and
- other resources used in such service.
(Cost of other resources includes related overheads.)
Cost of services rendered by - charges payable to the contractor
contractors within the facilities of the - cost of materials,
entity - consumable stores and spares,
- manpower,
- equipment usage,
- utilities, and
- other resources provided to the contractors for such
services.
Cost of services rendered by - invoice or agreed price including duties and taxes, and

contractors at their premises - other expenditure directly attributable thereto net of

(December 2011) discounts (other than cash discount), taxes and duties
refundable or to be credited.
- This cost shall also include the cost of resources provided
to the contractors.
Cost of services for the purpose of - Cost of services as determined above
inter unit transfers - distribution costs incurred for such transfers
Cost of services for the purpose of - Cost of services as determined above
inter-company (related party) - distribution cost incurred for such transfers and
transfers - administrative overheads.
Cost of services rendered to outside - Cost of services as determined above
parties (other than related party) - distribution cost incurred for such transfers,
- administrative overheads and
- marketing overheads.
- Finance costs incurred and the imputed costs incurred in connection with the Service Cost Centre shall not
form part of the cost of Service Cost Centre.
- Where the cost of service cost centre is accounted at standard cost, the price and usage variances related to the
services cost Centre shall be treated as part of cost of services. Usage variances due to abnormal reasons shall
be treated as part of abnormal cost.
- Any Subsidy / Grant / Incentive or any such payment received / receivable with respect to any service cost
centre shall be reduced for ascertainment of the cost when the amount is recognised as income.
- The cost of production and distribution of the service shall be determined based on the normal capacity or
actual capacity utilization whichever is higher and unabsorbed cost, if any, shall be treated as abnormal cost.
- Cost of a Stand-by service shall include the committed costs of maintaining such a facility for the service. All
related cost of the standby service cost centre is to be absorbed irrespective of its level of utilization. For
example fire service.
- Any abnormal cost where it is material and quantifiable shall not form part of the cost of the service cost
centre.
- Penalties, damages paid to statutory authorities or other third parties shall not form part of the cost of the
service cost centre.
- Credits/recoveries relating to the service cost centre including charges for services rendered to outside parties,
material and quantifiable, shall be reduced from the total cost of that service cost centre.
- Any change in the cost accounting principles applied for the measurement of the cost of Service Cost Centre
shall be made, only if it is required by law or for compliance with the requirements of a cost accounting
standard, or a change would result in a more appropriate preparation or presentation of cost statements of an
enterprise.
Assignment of Cost
- While assigning cost of services, traceability to a cost object in an economically feasible manner shall be
the guiding principle.
- Where the cost of services rendered by a service cost centre is not directly traceable to a cost object, it shall
be assigned on the most appropriate basis.
- The most appropriate basis of distribution of cost of a service cost centre to the cost centres consuming
services is to be derived from logical parameters which could be related to the usage of the service
rendered. The parameter shall be equitable, reasonable and consistent
- The following table gives example of the basis to be adopted for distribution of cost of service cost centres
to user cost centres:
Service Cost Centre Basis of assignment to Production /cost object

Human resource department Number of employees
Inspection department Man Hour
Purchase department Value of materials purchased/ number of purchase

orders placed for various departments.

Quality Control No. of tests / No. of Testing Hours
Security Services No. of employees/Units produced / Production Cost
Crane service Through put handled.
Transport Volume/weight of material handled
For Manpower - No of man power transported
Disclosures
- The basis of distribution of cost of each service cost centre to the consuming centres.
- The cost of purchase, production, distribution, marketing and price of services with reference to sales to
outside parties
- Where the cost of service cost centre is disclosed at standard cost, the price and usage variances
- The cost of services received from / rendered to related parties.
- Cost of service cost centre incurred in foreign exchange.
- Any Subsidy/Grant/Incentive and any such payment reduced from cost of Service Cost Centre.
- Credits/ recoveries relating to the cost of Service Cost Centre
- Any abnormal cost excluded from cost of Service Cost Centre
- Penalties and damages paid excluded from cost of Service Cost Centre.
the cost of service cost centre during the period covered
- Related party as per the applicable legal requirements relating to the cost statement as on the date of the
statement by the cost statement which has a material effect on the cost of service cost centre shall be
disclosed. Where the effect of such change is not ascertainable wholly or partly the fact shall be disclosed.
- Disclosures shall be made only where material and significant.
- Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule
prominently.

CAS 14 – POLLUTION CONTROL COST
This standard deals with the principles and methods of classification, measurement and assignment of pollution
control costs, for determination of Cost of product or service, and the presentation and disclosure in cost
statements.
Objective
the Pollution Control Costs with reasonable accuracy.
Scope
This standard should to be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Pollution Control Costs including those requiring attestation.
Definitions
Air pollutant: Air Pollutant means any solid, liquid or gaseous substance (including noise) present in the
atmosphere in such concentration as may be or tend to be injurious to human beings or other living creatures or
plants or property or environment.
Air Pollution: Air pollution means the presence in the atmosphere of any air pollutant.
Environment: Environment includes water, air and land and the inter-relationship which exists among and
between water, air and land, and human beings, other living creatures, plants, micro-organism and property.
Environmental Pollutant: Environmental Pollutant means any solid, liquid or gaseous substance present in such
concentration as may be, or tend to be, injurious to environment.
Environment Pollution: Environmental pollution means the presence in the environment of any environmental
pollutant.
Interest and Finance charges: Interest, including any payment in the nature of interest for use of non equity
funds and incidental cost that an entity incurs in arranging those funds. This will include-
- interest and commitment charges on bank borrowings,

- other short term and long term borrowings,
- amortisation of discounts or premium related to borrowings,
- amortisation of ancillary cost incurred in connection with the arrangements of borrowings, \
- finance charges in respect of finance leases,
- other similar arrangements and
- exchange differences arising from foreign currency borrowings to the extent they are regarded as an
adjustment to the interest costs.
The terms Finance costs and Borrowing costs are used interchangeably.
Pollution Control: Pollution Control means the control of emissions and effluents into environment. It
constitutes the use of materials, processes, or practices to reduce, minimize, or eliminate the creation of pollutants
or wastes. It includes practices that reduce the use of toxic or hazardous materials, energy, water, and / or other
resources. (ICWAI Final December 2012)
Production overheads: Indirect costs involved in the production process or in rendering service. The terms
Production Overheads, Factory Overheads, Works Overheads and Manufacturing Overheads denote the same
meaning and are used interchangeably. Production overheads shall include administration cost relating to
production, factory, works or manufacturing.

Soil Pollutant: Soil Pollutant is a substance such as cadmium, copper, arsenic, mercury, oil and organic solvent,
which is the source of soil contamination.
Soil Pollution: Soil pollution means the presence of any soil pollutant(s) in the soil which is harmful to the living
beings when it crosses its threshold concentration level.
Water pollution: Pollution means such contamination of water or such alteration of the physical, chemical or
biological properties of water or such discharge of any sewage or trade effluent or of any other liquid, gaseous or
solid substance into water (whether directly or indirectly) as may, or is likely to, create a nuisance or render such
water harmful or injurious to public health or safety, or to domestic, commercial, industrial, agricultural or other
legitimate uses, or to the life and health of animals or plants or of aquatic organisms.
- Pollution Control costs shall be the aggregate of direct and indirect cost relating to Pollution Control activity.
- Costs of Pollution Control which are internal to the entity should be accounted for when incurred. They
should be measured at the historical cost of resources consumed.
Principles for measurement for specified Pollution Control Cost

Type of Pollution Control Cost Principle of measurement of Cost
Future remediation or disposal costs - which Cost shall be estimated and accounted based on the
are expected to be incurred with reasonable quantum of pollution generated in each period and the
certainty as part of Onerous Contract or associated cost of remediation or disposal in future. For
Constructive Obligation which is legally example future disposal costs of solid waste generated
enforceable. during the current period should be estimated on, say, a per
(June 2014) tonne basis.
Contingent future remediation or disposal Shall not be treated as cost until the incidence of such costs
costs - those likely to arise on account of become reasonably certain and can be measured.
future legislative changes on pollution control External costs of pollution (i.e. compensation by the
polluting entity / Company either under future legislation or
under social pressure including social costs) are difficult to
estimate with reasonable accuracy and are, thus, excluded
from general purpose cost statements.
Cost of in-house Pollution Control activity Shall include cost of materials, consumable stores, spares,
(December 2016) manpower, equipment usage, utilities, and other resources
used in such activity.
Cost of Pollution Control activity carried out Shall include charges payable to the contractor and cost of
by outside contractors inside the entity materials, consumable stores, spares, manpower, equipment
(June 2013) usage, utilities, and other costs incurred by the entity for
such jobs.
Cost of Pollution Control jobs carried out by Cost shall be determined at invoice or agreed price
contractor at its premises including duties and taxes, and other expenditure directly
(June 2013) attributable thereto net of discounts (other than cash
discount), taxes and duties refundable or to be credited.
This cost shall also include the cost of other resources
provided to the contractors.
- Each type of Pollution Control e.g. water, air, soil pollution shall be treated as a distinct activity, if material
and identifiable.
- Finance costs incurred in connection with the Pollution Control activities shall not form part of Pollution
Control costs.
- Pollution Control costs shall not include imputed costs.

- Price variances related to Pollution Control, where standard costs are in use, shall be treated as part of
Pollution Control cost. The portion of usage variances attributable to normal reasons shall be treated as part
of Pollution Control cost. Usage variances attributable to abnormal reasons shall be excluded from Pollution
Control cost.
- Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to Pollution Control
activity, if any, shall be reduced for ascertainment of the cost of the cost object to which such amounts are
related.
- Any Pollution Control cost resulting from abnormal circumstances, if material and quantifiable, shall not
form part of the Pollution Control cost. Fines, penalties, damages and similar levies paid to statutory
authorities or other third parties shall not form part of the Pollution Control cost.
- Credits / recoveries relating to the Pollution Control activity, material and quantifiable, shall be deducted to
arrive at the net Pollution Control cost.
- Research and development cost to develop new process, new products or use of new materials to avoid or
mitigate pollution shall be treated as research and development costs and not included under pollution control
costs. Development costs incurred for commercial development of such product, process or material shall be
included in pollution control costs.
- Any change in the cost accounting principles applied for the measurement of the Pollution Control cost
should be made only if, it is required by law or for compliance with the requirements of a cost accounting
standard, or a change would result in a more appropriate preparation or presentation of cost statements of an
organisation.
Assignment of costs
- Pollution Control costs shall be traced to a cost object to the extent economically feasible.
- Where the Pollution Control cost is not directly traceable to cost object, (like costs of certification such as
ISO 14000 and registration fees payable to pollution control authorities ) it shall be treated as overhead and
assigned based on either of the following two principles;
i) Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost.
ii) Benefits received – overheads are to be apportioned to the various cost objects in proportion to the
- If the Pollution Control cost (including the share of the cost of reciprocal exchange of services) is shared by
several cost objects, the related cost shall be measured as an aggregate and distributed among the cost objects
as per principles laid down in Cost Accounting Standard – 3.
Disclosures
Disclosures shall be made only where material, significant and quantifiable.
Cost incurred on pollution control relating to prior periods and taken to reconciliation directly shall be disclosed
separately.
Where estimates are made of future costs to be incurred on pollution control, the basis of estimate shall be
disclosed separately.
If a descriptive note dealing with the social cost of pollution caused by the entity and the control of such pollution
is contained in the same document as the cost statement, the cost Statement shall carry a reference to such
descriptive note.
Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule.

Any change in the cost accounting principles and methods applied for the measurement and assignment of the
Pollution Control cost during the period covered by the cost statement which has a material effect on the Pollution
Control cost shall be disclosed.
Where the effect of such change is not ascertainable wholly or partly the fact shall be indicated.
1) The basis of distribution of Pollution Control cost to the cost objects/ cost units.
2) Where standard cost is applied in Pollution Control cost, the price and usage variances.
3) Pollution Control cost of Jobs done in-house and outsourced separately.
4) Pollution Control cost paid/ payable to related parties.
5) Pollution Control cost incurred in foreign exchange.
6) Any Subsidy / Grant / Incentive or any amount of similar nature received / receivable reduced from
Pollution Control cost.
7) Any credits / recoveries relating to the Pollution Control cost.
8) Any abnormal portion of the Pollution Control cost.
9) Penalties and damages excluded from the Pollution Control cost. (Final June 2015)

CAS 15 – SELLING AND DISTRIBUTION OVERHEADS
This standard deals with the principles and methods of classification, measurement and assignment of Selling and
Distribution Overheads, for determination of the cost of sales of product or service, and the presentation and
disclosure in cost statements.
the Selling and Distribution Overheads with reasonable accuracy.
Distribution costs or Distribution overheads: Distribution Overheads are the costs incurred in handling a
product or service from the time it is ready for delivery until it reaches the ultimate consumer. The cost of
packing, repacking, labelling, etc. at an intermediate storage location will be part of distribution cost.
Selling Overheads: Selling Overheads, also known as Selling Costs, are the expenses related to sale of products
and include all Indirect Expenses in sales management for the organization. Eg. Salaries and travelling expenses
of sales personnel
Principles of Measurement of Cost
- Selling and Distribution Overheads shall be the aggregate of the cost of resources consumed in the selling
and distribution activities of the entity.
- The cost of resources procured from outside shall be determined at invoice or agreed price including
duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash
discounts), taxes and duties refundable or to be credited by the Tax Authorities.
- Selling and Distribution Overheads, the benefits of which are expected to be derived over a long period,
shall be amortised on a rational basis.
- Selling and distribution overheads shall not include imputed cost.
- Cost of after Sales Service provided in terms of sale agreement for a class of transactions, shall be
determined on rational and scientific basis, net of any recovery on the service.
- Any Subsidy / Grant / Incentive or any such payment received / receivable with respect to any Selling and
Distribution Overheads shall be reduced from the cost of the sales of the cost object.
- Any abnormal cost relating to selling and distribution activity shall be excluded from the Selling and
Distribution Overheads.
- Any demurrage or detention charges, or penalty levied by transportation or other authorities in respect of
distribution activity shall not form part of the Selling and Distribution Overhead.
- Penalties and damages paid to statutory authorities or other third parties shall not form part of the Selling
and Distribution Overheads.
- Credits / recoveries relating to the Selling and Distribution Overheads including those rendered without
any consideration, material and quantifiable, shall be deducted to arrive at the net Selling and Distribution
Overheads.
- Any change in the cost accounting principles applied for the measurement of the Selling and Distribution
Overheads shall be made only if it is required by law or for compliance with the requirements of a cost
accounting standard or a change would result in a more appropriate preparation or presentation of cost
Assignment of Cost
- Selling and Distribution Overheads directly traceable shall be assigned to the relevant product sold or
services rendered.
- Transportation cost relating to distribution shall be assigned as per CAS – 5, where relevant and
applicable.
- Assignment of Selling and Distribution Overheads to the cost objects shall be based on either of the
following two principles;
i) Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost.

ii) Benefits received – overheads are to be apportioned to the various cost objects in proportion to the
Disclosure: The cost statements shall disclose the following:
- The basis of distribution of Selling and Distribution Overheads to the cost objects.
- Selling and Distribution Overheads incurred in foreign exchange.
- Cost of Selling and Distribution services rendered to related parties.
- Any Subsidy / Grant / Incentive and any such payment reduced from Selling and Distribution Overheads.
- Credits / recoveries relating to the Selling and Distribution Overheads.
- Penalties and damages excluded from the Selling and Distribution Overheads.
- Disclosures shall be made only where material and significant.
- Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule.
the Selling and Distribution Overheads during the period covered by the cost statement which has a
material effect on the Selling and Distribution Overheads shall be disclosed. Where the effect of such

CAS 16 – DEPRECIATION AND AMORTISATION
This standard deals with the principles and methods of measurement and assignment of depreciation and
amortisation, for determination of the cost of product or service, and the presentation and disclosure in cost
statements.
the depreciation and amortisation with reasonable accuracy.
Amortisation: Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its
useful life. It refers to expensing the acquisition cost minus the residual value of intangible assets such as
Franchise, Patents and Trademarks or Copyrights in a systematic manner over their estimated useful economic
life so as to reflect their consumption in the production of goods and services.
Asset: An asset is a resource controlled by the enterprise as a result of past events from which future economic
benefits are expected to flow to the enterprise. In case of some assets which are acquired for safety or
environmental reasons, the acquisition of such assets may not provide future economic benefits directly but may
be necessary for an entity to obtain the future economic benefits from other assets. Such items also qualify for
recognition as assets.
Current asset: An entity shall classify an asset as current when:
a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
b) it holds the asset primarily for the purpose of trading;
c) it expects to realise the asset within twelve months after the reporting period; or
d) the asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting period.
Depreciation: Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable
asset arising from use, efflux of time or obsolescence through technology and market changes. Depreciation is
allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the
estimated useful life of the asset.
Depreciable plant property and equipment (‘PPE’) are tangible assets that:
(i) are held for use in the production of goods or supply of services, for rental to others, for
administrative, selling or distribution purposes; and
(ii) are expected to be used during more than one accounting period.
Land is not a depreciable asset as it does not have a defined useful life.
Impairment Loss: An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Intangible Asset: An intangible asset is an identifiable non-monetary asset without physical substance.
Residual (salvage) value: Residual value is the amount which an enterprise expects to obtain for an asset at the
end of its useful life after deducting the expected costs of disposal. The residual value of an intangible asset shall
be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
(b) there is an active market for the asset and:

Useful life of asset is either
(i) the period over which a depreciable asset is expected to be used by the enterprise; or
(ii) the number of production or similar units expected to be obtained from the use of the asset by the
entity
While estimating the useful life of a depreciable asset, consideration shall be given to the following factors:
(a) Expected physical wear and tear;
(b) Obsolescence; and
(c) Legal or other limits on the use of the asset. (Final June 2014)
Depreciation and Amortisation shall be measured based on the depreciable amount and the useful life.
In case of regulated industry the amount of depreciation shall be the same as prescribed by the concerned
regulator.
Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary
for it to be capable of operating in the manner intended by management.
An asset which is used only when the need arises but is always held ready for use. Example: fire extinguisher,
stand by generator, safety equipment shall be considered to be an asset in use. Depreciable assets will be
considered to be put into use when commercial production of goods and services commences.
Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a
disposal group that is classified as held for sale) or the date that the asset is de-recognized.
Depreciation of any addition or extension to an existing depreciable asset which becomes an integral part of that
asset shall be based on the remaining useful life of that asset.
Depreciation of any addition or extension to an existing depreciable asset which retains a separate identity and is
capable of being used after the expiry of the useful life of that asset shall be based on the estimated useful life of
that addition or extension.
The method of amortisation of intangible asset shall reflect the pattern in which the economic benefits are
expected to be consumed by the entity.
The impact of higher depreciation due to revaluation of assets shall not be assigned to cost object.
Impairment loss on assets shall be excluded from cost of production.
The method of depreciation / amortisation used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. An entity can use any of the methods of depreciation to assign
depreciable amount of an asset on a systematic basis over its useful life. For example:
a) Straight-line method;
b) Diminishing balance method; and
c) Units of production method.

The methods and rates of depreciation applied shall be reviewed at least annually and, if there has been a change
in the expected pattern of consumption or loss of future economic benefits, the method applied shall be changed
to reflect the changed pattern.
Items such as spare parts, stand-by equipment and servicing equipment are recognized as property, Plant and
Equipment when they meet the definition of Property, Plant and Equipment and depreciated accordingly.
Otherwise, such items are classified as inventory and recognised in cost as and when they are consumed.
Cost of small assets shall be written off in the period in which they were purchased as per the accounting policy of
the entity. Eg. The company may have a policy of writing off assets costing less than Rs. 5,000 in the year of
purchase.
Depreciation of an asset shall not be considered in case cumulative depreciation exceeds the original cost of the
asset, net of residual value.
Where depreciation for an addition of an asset is measured on the basis of the number of days for which the asset
was used for the preparation and presentation of financial statements, depreciation of the asset for assigning to
cost of object shall be measured in relation to the period, the asset actually utilized.
Assignment of Costs
Depreciation and Amortisation shall be traced to the cost object to the extent economically feasible.
Where the depreciation and Amortisation is not directly traceable to cost object, it shall be assigned based on
either of the following two principles:
i. Cause and effect - cause is a process or operation or activity and effect is the incurrence of cost.
ii. Benefits received– depreciation and Amortisation is to be apportioned to the various cost objects in
Presentation
Depreciation and Amortisation, if material, shall be presented in the cost statement as a separate item of cost.
Disclosures
The cost statement shall disclose the following:-
1 The basis of distribution of Depreciation and Amortisation to the cost objects.

2 Any credits / recoveries relating to Depreciation and Amortisation.
3 Additional Depreciation on account of revaluation of asset, which is not included in cost.
4 Amount of depreciation that is not included in cost because of temporary retirement of assets from production
of goods and services.
Disclosure shall be made only where material, significant and quantifiable.
Disclosures shall be made in the body of the cost statement or as a foot note or in a separate schedule.
Any change in the cost accounting principles and methods applied for the measurement and assignment of
Depreciation and Amortisation during the period covered by the cost statement which has a material effect on
Depreciation and Amortisation shall be disclosed. Where the effect of such change is not ascertainable wholly or
partly, the fact shall be indicated.

CAS-17 - INTEREST AND FINANCING CHARGES
This standard deals with the principles and methods of classification, measurement and assignment of Interest and
Financing Charges.
Objective
The objective of this standard is to bring uniformity and consistency in the principles, methods of determining and
assigning the Interest and Financing Charges with reasonable accuracy.
This standard should be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Interest and Financing Charges including those requiring attestation.
This standard does not deal with costs relating to risk management through derivatives.
Interest and Financing charges: Interest and other costs incurred by an entity in connection with the financing
arrangements. Examples are:
1. Interest and commitment charges on bank borrowings, other short term and long term borrowings:
2. Financing Charges in respect of finance leases and other similar arrangements: and
3. Exchange differences arising from foreign currency borrowings to the extent they are regarded as an
adjustment to the interest costs.
Short term borrowing is the borrowing which is repayable within one year from the date of disbursal as per Loan
Agreement.
Long term borrowing is the borrowing which is repayable after one year from the date of disbursal as per Loan
Agreement.
Interest and Financing Charges shall be measured in accordance with the Accounting Standards notified by the
Central Government under the Companies (Accounting Standards) Rules 2006 or with the Indian Accounting
Standards notified under the Companies (Indian Accounting Standards) Rules 2015, as applicable.
Interest and Financing Charges incurred shall be identified for:
(a) acquisition / construction/ production of qualifying assets including fixed assets; and
(b) Other finance costs for production of goods/ operations or services rendered which cannot be classified as
qualifying assets.
Interest and Financing Charges directly attributable to the acquisition /construction/ production of a qualifying
asset shall be included in the cost of the asset.
Interest and Financing Charges shall not include imputed costs.
Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to Interest and
Financing Charges if any, shall be reduced to ascertain the net interest and financing charges.
Penal Interest for delayed payment, Fines, penalties, damages and similar levies paid to statutory authorities or
other third parties shall not form part of the Interest and Financing Charges.

In case the company delays the payment of Statutory dues beyond the stipulated date, interest paid for delayed
payment shall not be treated as penal interest. Eg. Interest paid on delay in deposit of PF or TDS etc.
Interest paid for or received on investment shall not form part of the other financing charges for production of
goods / operations or services rendered;
Assignment of costs
Assignment of Interest and Financing Charges to the cost objects shall be based on either of the following
principles;
I. Cause and effect- cause is the process or operation or activity and effect is the incurrence of cost.
II. Benefits received- Interest and Financing Charges are to be apportioned to the various cost objects in
Presentation
Interest and Financing Charges shall be presented in the cost statement as a separate item of cost of sales.
Disclosures
1. The basis of distribution of Interest and Financing Charges to the cost objects/ cost units.
2. Where predetermined cost is applied in Interest and Financing Charges, the rate and usage variances.
3. Interest and Financing Charges paid/ payable to related parties.
4. Interest and Financing Charges incurred in foreign exchange.
5. Any Subsidy / Grant / Incentive or any amount of similar nature received / receivable reduced Interest and
Financing Charges.
Interest and Financing Charges incurred relating to prior periods and taken to reconciliation directly shall be
disclosed separately.
Interest and Financing Charges during the period covered by the cost statement which has a material effect on the
Interest and Financing Charges shall be disclosed. Where the effect of such change is not ascertainable wholly or
partly the fact shall be indicated.

CAS-18 - RESEARCH AND DEVELOPMENT COSTS
This standard deals with the principles and methods of determining the Research, and Development Costs and
their classification, measurement and assignment for determination of the cost of product or service, and the
presentation and disclosure in cost statements.
Objective
The objective of this standard is to bring uniformity and consistency in the principles, methods of determining the
Research, and Development Costs with reasonable accuracy and presentation of the same.
This standard should be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Interest and Financing Charges including those requiring attestation.
Research: Research is original and planned investigation undertaken with the prospect of gaining new scientific
or technical knowledge and understanding.
Development: Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or services prior to
the commencement of commercial production or use.
Research, and Development Costs shall include all the costs that are directly traceable to research and/or
development activities or that can be assigned to research and development activities strictly on the basis of a)
cause and effect or b) benefits received. Such costs shall include the following elements:
1 The cost of materials and services consumed in Research and Development activities.
2 Cost of bought out materials and hired services as per invoice or agreed price including duties and taxes
directly attributable thereto net of trade discounts, rebates, taxes and duties refundable or to be credited.
3 The salaries, wages and other related costs of personnel engaged in Research, and Development activities;
4 The depreciation of equipment and facilities, and other tangible assets, and amortisation of intangible assets to
the extent that they are used for Research, and Development activities;
5 Overhead costs, other than general administrative costs, related to Research and Development activities.
6 Costs incurred for carrying out Research, and Development activities by other entities and charged to the
entity; and
7 Expenditure incurred in securing copyrights or licenses
8 Expenditure incurred for developing computer software
9 Costs incurred for the design of tools, jigs, moulds and dies
10 Other costs that can be directly attributed to Research, and Development activities and can be identified with
specific projects. (June 2015)
Subsidy / Grant / Incentive or amount of similar nature received / receivable with respect to Research, and
Development Activity, if any, shall be reduced from the cost of such Research, and Development Activity.
Any abnormal cost where it is material and quantifiable shall not form part of the Research, and Development
Cost.
Fines, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form part
of the Research, and Development Cost.

The amortisation of an intangible asset arising from the development activity shall be treated as set out in the CAS
16 relating to Depreciation and Amortisation.
Research, and Development costs shall not include imputed costs.
Credits/recoveries relating to Research, and Development cost, if material and quantifiable, including from the
sale of output produced from the Research and Development activity shall be deducted from the Research and
Development cost.
Assignment of Cost (Final June 2015)
Type of research and development cost Treatment of cost

Research, and Development costs attributable to a assigned to that cost object directly.
specific cost object
Research, development costs that are not attributable to shall not form part of the product cost.
a specific product or process
Research and Development Costs incurred for the included in the cost of production
development and improvement of an existing process
or product which continues for a period less than
one year
Research and Development activity related to the accumulated and amortised over the estimated period of
improvement of an existing process or product use of the improved process or product (after the
continues for more than one accounting period commencement of commercial production). The
amount so allocated shall be included in the cost of
production.
However, if the expenditure is only to improve the

quality of the existing product or minor modifications
in attributes, the principle shall not be applied.
Development cost which results in the creation of an shall be amortised over the useful life of intangible
intangible asset asset
Development costs attributable to a saleable service e.g. accumulated separately and treated as cost of providing
providing technical know-how to outside parties the service
Presentation
Research and Development costs relating to improvement of the process or products or services shall be presented
as a separate item of cost in the cost statement under cost of production.
Research, and Development costs which are not related to improvement of the process, materials, devices,
processes, systems, product or services shall be presented as a part of the reconciliation statement.
Disclosures
1. The basis of accumulation and assignment of Research and Development costs.
2. The Research, and Development costs paid to related parties.
3. Credit/recoveries from related parties
4. Research, and Development cost incurred in foreign exchange.

5. Any Subsidy/Grant/Incentive and any such payment reduced from Research, and Development cost.
6. Credits/recoveries deducted from the Research, and Development cost.
7. Any abnormal cost excluded from Research, and Development cost including cost of abandoned projects and
research activities considered abnormal.
8. Penalties and damages paid etc. excluded from Research, and Development cost.
Research, and Development cost during the period covered by the cost statement that has a material effect on the
Research, and Development cost shall be disclosed. Where the effect of such change is not ascertainable wholly
or partly the fact shall be indicated.

CAS-19 JOINT COSTS
The standard deals with the principles and methods of measurement and assignment of Joint Costs and the
presentation and disclosure in cost statement.
Objective
The objective of this standard is to bring uniformity, consistency in the principles, methods of determining and
assigning Joint Costs with reasonable accuracy.
Scope
The standard shall be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Joint Costs including those requiring attestation.
By-Product: output of some value produced incidentally while manufacturing the main product
Joint Costs: Joint costs are the cost of common resources used to produce two or more products or services
simultaneously.
Joint product: two or more products produced by the same process and separated in processing, each having a
sufficiently high saleable value to merit recognition as a main product.
Scrap: Discarded material having some value in few cases and which is usually either disposed of without further
treatment (other than reclamation and handling) or reintroduced into the production process in place of raw
material.
Split off point: The point in the production process at which joint products become separately identifiable. The
terms split off point and separation point are used interchangeably.
contamination, unrecoverable residue, shrinkage, etc. and discarded material which may or may not have a value.
The principles and methods for measuring Joint costs are as under:-
Joint Cost incurred Measurement of Cost

Upto Split off point As stipulated in other cost accounting standards
After split-off point on product Cost incurred shall be measured for the resources consumed for each
separately identifiable Joint/By-Product.
Cost incurred after split-off point for Aggregate of direct and indirect costs
further processing of joint product/By-
Product
Cost of further processing of joint Invoice or agreed price including duties and taxes, net of discounts
product/By-Product carried out by (other than cash discount) taxes and duties refundable or to be credited
outside parties and other expenditure directly attributable to such processing.
This cost shall also include the cost of resources, if any, provided to
outside parties.

In case the production process generates scrap or waste, realized or realizable value, net of disposal cost, of scrap
and waste shall be deducted from the cost of Joint Product.
Any Subsidy / Grant / Incentive or any such payment received / receivable with respect to any joint product /By-
Product shall be reduced for ascertainment of the cost to which such amounts are related.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the cost of the joint
product /By-Product.
Assignment
Joint cost incurred shall be assigned to joint products based on benefits received, which is measured using any of
the following methods:
a) Physical Units Method.
b) Net Realisable Value at split-off point.
c) Technical estimates
The value of By-Product shall be estimated using any of the following methods for adjusting joint costs:
a. Net realizable value - Net realizable value for this purpose means the net selling price per unit multiplied by
quantity (Quantity sold). Net realizable value is to be adjusted for the post- split off costs.
b. Technical Estimates - This method may be adopted where the By-Product is not saleable in the condition in
which it emerges or comparative prices of similar products are not available.
Presentation
The Cost Statement shall present the element wise cost of individual products produced jointly and the value
assigned to By-Products.
Disclosures (Final December 2015)
- The Cost statement shall disclose the basis of allocation of Joint costs to individual products and the
value assigned to the By-Products
- The disclosure should be made only where material, significant & quantifiable.
- Disclosures shall be made in the body of Cost Statements or as a foot note or as a separate schedule.
- Any change in the cost accounting principles and methods applied for the measurement and
assignment of the Joint costs and the value assigned to by-product during the period covered by the
cost statement which has a material effect on the Joint/ By-Products shall be disclosed. Where the
effect of such change is not ascertainable wholly or partly the fact shall be indicated.

CAS-20 - ROYALTY AND TECHNICAL KNOW-HOW FEE
This standard deals with the principles and methods of classification, measurement and assignment of the amount
of Royalty and Technical Know-how Fee, for determination of the cost of product or service, and their
presentation and disclosure in cost statements.
Objective - The objective of this standard is to bring uniformity and consistency in the principles and methods of
determining the amount of Royalty and Technical Know-how Fee with reasonable accuracy.
Scope - This standard should be applied to cost statements, which require classification, measurement,
assignment, presentation and disclosure of the amount of Royalty and Technical Know-how Fee including those
requiring attestation.
Royalty is a compensation/ periodic payments for the use of asset (tangible and/or intangible) to the owner for
use of his asset in the production, selling and distribution by an entity.
Royalty is often expressed as a percentage of the revenues obtained by use of the owner’s asset (tangible and/or
intangible); per unit of production or sales value. It may relate to use of:
- Non-renewable resource (petroleum and mineral resources) ;

- Patents;
- Trademarks;
- Franchise rights;
- Copy rights;
- art-work,
- software and the like.
Technical Know-how Fee: Technical Know-how Fee is a lump sum or periodical amount payable to provider of
technical Know-how in the form of design, drawings, training of personnel, or practical knowledge, skills or
experience.
Royalty and Technical Know-how Fee paid or incurred in lump-sum or which are in the nature of ‘one – time’
payment, shall be amortised on the basis of the estimated output or benefit to be derived from the related asset.
Examples: Amortisation of the amount of Royalty or Technical Know-how fee paid for which the benefit is
ensued in the current or future periods shall be determined based on the production / service volumes estimated
for the period over which the asset is expected to benefit the entity.
Amount of the Royalty and Technical Know-how Fee shall not include finance costs and imputed costs.
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to amount of Royalty and
Technical Know-how fee shall be reduced to measure the amount of royalty and technical know- how fee.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the amount of Royalty
and Technical Know-how fee.
Credits/ recoveries relating to the amount Royalty and Technical Know-how fee, material and quantifiable, shall
be deducted to arrive at the net amount of Royalty and Technical Knowhow fee.

Any change in the cost accounting principles applied for the measurement of the amount of Royalty and
Technical Know-how Fee should be made only if, it is required by law or for compliance with the requirements of
a cost accounting standard, or a change would result in a more appropriate preparation or presentation of cost
statements of an organisation.
Assignment of costs
Royalty and Technical Know-how fee that is directly traceable to a cost object shall be assigned to that cost
object. In case such fee is not directly traceable to a cost object then it shall be assigned on any of the following
basis:
a. Units produced
b. Units sold
c. Sales value
The amount of Royalty and Technical Know-how fee shall be assigned on the nature/ purpose of such fee.
Assignment of specific
Type of Royalty Treatment of Cost

Royalty fee paid for mining rights form part of the cost of material
Royalty and technical know-how fee related to product treated as cost of production
or process know how
Royalty related to trademarks or brands treated as cost of sales
Presentation
The amount Royalty and Technical Know-how fee shall be presented as a separate cost head with suitable
classification.
Disclosures
1. The basis of distribution of the amount Royalty and Technical Know-how fee to the cost objects/ cost
units.
2. Quantity and the related rate of items of the amount of Royalty and Technical Know-how fee, as
applicable.
3. Royalty and Technical Know-how fee paid/ payable to related parties.
4. Royalty and Technical Know-how fee incurred in foreign exchange.
5. Any Subsidy/Grant/Incentive and any such payment reduced from the amount of Royalty and Technical
Know-how fee.
6. Credits/recoveries relating to the amount of Royalty and Technical Know-how fee.
7. Penalties and damages excluded from the amount of Royalty and Technical Knowhow fee
8. Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate schedule.
9. Any change in the cost accounting principles and methods applied for the measurement and assignment of
the amount Royalty and Technical Know-how fee during the period covered by the cost statement which

has a material effect on the amount Royalty and Technical Know-how fee. Where the effect of such
(Final December 2016)

CAS-21 - QUALITY CONTROL
The standard deals with the principles and methods of measurement and assignment of Quality Control cost and
the presentation and disclosure in cost statement.
Objective - The objective of this standard is to bring uniformity, consistency in the principles, methods of
determining and assigning Quality Control cost with reasonable accuracy.
Scope - The standard should be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Quality Control cost including those requiring attestation.
Definitions
Quality: Quality is the conformance to requirements or specifications. The quality of a product or service is
fitness of that product or service for meeting its intended use as required by customer.
Quality control: A procedure or a set of procedures exclusively designed to ensure that the manufactured
products or performed service adhere to a defined set of quality criterion or meets requirement of the client or the
customer. (June 2018)
Quality Control cost: This represents Cost of resources consumed towards quality control procedures.
(June 2018)
Scrap: Discarded material having some value in few cases and which is usually either disposed of without further
treatment (other than reclamation and handling) or reintroduced into the production process in place of raw
material.
contamination, unrecoverable residue, shrinkage, etc., and discarded material which may or may not have value.
Spoilage: Production that does not meet with dimensional or quality standards in such a way that it cannot be
rectified economically and is sold for a disposal value.
Net Spoilage is the difference between costs accumulated up to the point of rejection and the salvage value.
Particulars Measurement of Cost

Quality Control cost The aggregate of the cost of resources consumed in the Quality
incurred in-house Control activities of the entity
Cost of resources procured Invoice or agreed price including duties and taxes, and other
from outside expenditure directly attributable thereto net of discounts (other than
cash discounts), taxes and duties refundable or to be credited by the
Tax Authorities.
(June 2018)
Quality Cost shall include Cost of conformance to:
(a) quality prevention cost; and
(b) quality appraisal cost.

Identification of Quality Control costs shall be based on traceability in an economically feasible manner.
Finance costs incurred in connection with the self generated or procured resources shall not form part of Quality
Control cost.
Quality Control costs shall not include imputed costs.
Any Subsidy/Grant/Incentive or any such payment received/receivable with respect to any Quality Control cost
shall be reduced for ascertainment of the cost of the cost object to which such amounts are related.
Any abnormal portion of the Quality Control cost where it is material and quantifiable shall not form part of the
Cost of Quality Control.
Penalties, damages paid to statutory authorities or other third parties shall not form part of the Quality Control
cost.
Any change in the cost accounting principles applied for the measurement of the Quality Control cost shall be
made only if, it is required by law or for compliance with the requirements of a cost accounting standard, or a
change would result in a more appropriate preparation or presentation of cost statements of an organisation.
(June 2018)
Assignment of costs
Quality Control cost that is directly traceable to the cost object shall be assigned to that cost object.
Assignment of Quality Control cost to the cost objects shall be based on benefits received by them. For example:
On the basis of number of tests performed for a product.
Presentation
Quality Control cost, if material, shall be presented as a separate cost head with suitable classification.
Disclosures
- The basis of distribution of Quality Control cost to the cost objects/ cost units.
- Quantity and Cost of resources used for Quality Control as applicable.
- Quality Control cost paid/ payable to related parties.
- Quality Control cost incurred in foreign exchange.
- Any abnormal portion of the Quality Control cost.
- Penalties and damages excluded from the Quality Control cost
Quality Control cost during the period covered by the cost statement which has a material effect on the Quality
Control cost shall be disclosed. Where the effect of such change is not ascertainable wholly or partly the fact shall
be indicated.

CAS – 22 - Manufacturing Cost
This standard deals with the principles and methods of determining the Manufacturing Cost of excisable goods.
This standard deals with the principles and methods of classification, measurement and assignment for
determination of the Manufacturing Cost of excisable goods and the presentation and disclosure in cost
statements.
Objective - The objective of this standard is to bring uniformity and consistency in the principles and methods of
determining the Manufacturing Cost of excisable goods.
Scope - This standard should be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Manufacturing Cost of excisable goods.
Manufacturing Cost: Manufacturing cost of an excisable good is the aggregate of costs of all resources used in
the process of its manufacturing. Manufacturing cost includes cost of Materials (including process materials),
Employee Cost, Cost of Utilities, Packing Cost, Direct Expenses, Repairs &Maintenance Cost, Pollution Control
Cost, Quality Control Cost, Research & Development Cost, Cost of Inputs received free of cost or received at
concessional value from the buyer of the excisable good, Depreciation and Amortisation (including amortisation
cost of free tools, patterns ,dies, drawings, blue prints, technical maps, charts, engineering, development, art work,
design work, plans, sketches, packaging material and the like necessary for production of excisable goods), Cost
of Rework, reconditioning, retro-fitment, Manufacturing Overheads, other costs allocable to such activity,
adjustment for stock of work-in-process and recoveries for sales of scrap and wastages and the like but does not
include expenses of the above nature incurred for post manufacturing purposes.
Manufacturing Cost and Cost of Production are used interchangeably.
Administrative overheads need to be analysed in relation to production/manufacturing activities and other

activities. Administrative overheads in relation to production/manufacturing activities shall be included in the
manufacturing cost.
Administrative overheads in relation to marketing, projects management, corporate office or any other expense
not related to the manufacturing activity shall be excluded from manufacturing cost.
Depreciation that is charged in audited financial statement should be considered.
Manufacturing Overheads: Indirect costs involved in the manufacturing process- The terms Manufacturing
Overheads, Factory Overheads, Works Overheads and Production Overheads have the same meaning and are used
interchangeably. Manufacturing overheads shall include administration cost relating to production, factory, works
or manufacturing and depot.
Manufacturing Overheads shall be classified on the basis of behavior as:
- Variable Manufacturing Overheads - Comprise of expenses which vary in proportion to the change in
volume of production. For example, cost of utilities etc.; and
- Fixed Manufacturing Overheads - comprise of expenses which does not change with the change in
volume of production. For example, salaries, rent, repairs & maintenance, etc.
Material Consumed: Material Consumed includes materials directly identified for production of excisable goods
such as:
(a) Indigenous materials
(b) Imported materials

(c) Bought out items
(d) Self-manufactured items
(e) Process materials and other items
(f) Materials received free of cost or at concessional value from the buyer
(g) Accessories, on which cenvat credit is admissible, and which are cleared along with the final product
(h) goods used for providing free warranty for excisable goods
Cost of material consumed consists of cost of material, duties and taxes, freight inwards, insurance and other
expenditure directly attributable to procurement. Trade discount, rebates and other similar items are deducted for
determining the cost of materials.
Cenvat credit, credit for Countervailing Customs Duty, Sales Tax set off, VAT, duty draw back and other similar
duties subsequently recovered/recoverable by the entity are also deducted.
Manufacturing cost for each excisable good shall be measured separately.
Manufacturing cost of each excisable good shall be the aggregate of direct and indirect cost relating to
manufacturing activity.
Material cost shall be measured separately for each type of material, that is, for indigenous material, imported
material, bought out components and process materials, self-manufactured items, accessories for each type of
excisable good.
Cost of Inputs received free of cost or at concessional value from the buyer of the excisable good shall be
considered for determination of manufacturing cost.
The material cost of normal scrap/defectives which are rejects shall be included in the material cost of excisable
goods manufactured. The material cost of actual scrap/ defectives, not exceeding the normal quantity shall be
adjusted in the material cost of good production. Realized or realizable value of scrap or waste shall be deducted
for determination of manufacturing cost. Material Cost of abnormal scrap /defectives should not be included in
material cost but treated as loss after deducting the realisable value of such scrap / defectives.
Employee Cost for each excisable good shall be measured separately.
The cost of utilities consumed for manufacturing of excisable good shall be measured for each type of utility.
Packing material cost used for each type of excisable good shall be measured separately.
If excisable goods are transferred/dispatched duly packed, the cost of such packing shall include cost of all types
of packing in which the excisable goods are removed from the place of removal.
The Direct Expenses for manufacturing of excisable goods shall be measured for each excisable good separately.
Repairs and maintenance cost for manufacturing of excisable goods shall be measured for each excisable good
separately.
Depreciation and Amortisation cost for manufacturing of excisable goods shall be measured for each excisable
good separately.

Research & Development cost for manufacturing of excisable goods shall be measured for each excisable good
separately.
Cost incurred for manufacturing of excisable goods after split-off point shall be measured for each Joint/By-
Product.
In case the manufacturing process generates scrap or waste, realized or realizable value net of cost of disposal, of
such scrap and waste shall be deducted from the cost of Joint Product.
Royalty and Technical Know-how Fee for manufacturing of excisable goods paid or incurred in lump-sum or
which are in the nature of ‘one-time’ payment, shall be amortised on the basis of the estimated output or benefit to
be derived from the related Technical Know-how.
Royalty paid on sales shall not form part of manufacturing cost of excisable good.
Quality Control cost incurred in-house for manufacturing of excisable goods shall be the aggregate of the cost of
resources used in the Quality Control activities in relation to each excisable good. The cost of resources procured
from outside shall be determined at invoice or agreed price including duties and taxes, and other expenditure
directly attributable thereto net of discounts, taxes and duties refundable or to be credited as input credit.
Manufacturing Overheads for excisable goods representing procurement of resources shall be determined at
invoice or agreed price including duties and taxes, and other expenditure directly attributable thereto net of
discounts; taxes and duties refundable or to be credited as input credit.
Manufacturing Overheads other than those referred to above shall be determined on the basis of cost incurred in
connection therewith.
Any abnormal cost, where it is material and quantifiable, shall not form part of the manufacturing cost of
excisable good.
Interest and other Finance costs are not part of manufacturing cost of excisable good.
Manufacturing cost of excisable good shall include cost of inputs received free of cost or at concessional value
from the buyer of excisable good and amortisation cost of free tools, pattern, dies, drawings, blue prints, technical
maps, charts, engineering, development, art work, design work, plans, sketches, and the like necessary for
production of excisable good. It shall also include cost of rework, reconditioning, retro-fitment, Manufacturing
Overheads and other costs allocable to such activity, adjustment for stock of work-in-process and recoveries from
sales of scrap and wastages and the like necessary for production of excisable good.
In case any input material, whether of direct or indirect nature, including packing material, is supplied free of cost
or at concessional value by the buyer of the excisable good, the cost of such material shall be included in the
manufacturing cost.
For example: Amortisation Cost of Moulds, Tools, Dies & Patterns and Cost of Packing Material etc. received
free of cost or at concessional value from the buyer of excisable good shall be included in manufacturing cost.
Any Subsidy/Grant/Incentive or any such payment received/receivable, from other entity, other than the buyer
with respect to any manufacturing cost of excisable good shall be deducted for ascertainment of the
manufacturing cost of excisable good to which such amounts are related.
The manufacturing cost of excisable good shall be determined based on the normal capacity or actual capacity
utilization whichever is higher and unabsorbed cost, if any, shall be treated as abnormal cost.
Fines, penalties, damages, demurrage and similar levies paid to statutory authorities or other third parties shall not
form part of the manufacturing cost of excisable good.

The forex component of imported material or other element of cost shall be converted at the rate on the date of the
transaction. Any subsequent change in the exchange rate till payment or otherwise shall not form part of
manufacturing cost of excisable good.
Credits/recoveries relating to the manufacturing cost, which are material and quantifiable, shall be deducted from
the total manufacturing cost to arrive at the net manufacturing cost of excisable good.
Work in process/progress stock shall be measured at cost computed for different stages of completion.
Stock of work-in-process/progress shall be valued at cost on the basis of stages of completion as per cost
accounting principles. Opening and closing stock of work-in-process/ progress shall be adjusted for computation
of manufacturing cost of an excisable good.
Assignment of Cost
While assigning various elements of manufacturing cost of excisable goods, traceability to an excisable good in
an economically feasible manner shall be the guiding principle. The cost which can be traced directly to each
excisable good shall be directly assigned.
Assignment of manufacturing cost of excisable goods, which are not directly traceable to the excisable good shall
be based on either of the following two principles;
- Cause and Effect – Cause is the process or operation or activity and effect is the incurrence of cost.
- Benefits received – to be apportioned to various cost objects in proportion to the benefits received by
them.
The variable manufacturing/production overheads shall be absorbed based on actual production.
The fixed manufacturing/production overheads and other similar item of fixed costs such as quality control cost,
research and development costs and administrative overheads relating to manufacturing shall be absorbed in the
manufacturing cost on the basis of the normal capacity or actual capacity utilization of the plant, whichever is
higher.
In case a production process results in more than one product being produced simultaneously, treatment of joint
products and by-products shall be as under:
- In case joint products are produced, joint costs are allocated between the products on a rational and consistent
basis.
- In case by-products are produced, the net realisable value of by-products is credited to the manufacturing cost of
the main product.
Miscellaneous Income relating to production/manufacture shall be adjusted in the determination of manufacturing

cost.
For example, income from sale of empty containers used for procurement of raw material shall be deducted in
determination of manufacturing cost.
Presentation
Cost statement shall present following information:
- Actual capacity utilization in absolute terms and as a percentage of normal capacity.

- Cost information relating to various elements of Cost shall be presented separately.
Disclosures
Disclosure shall be made only where material, significant and quantifiable.
If there is any change in cost accounting principles and practices during the period under review which may
materially affect the manufacturing cost of excisable good in terms of comparability with previous period(s), the
same shall be disclosed.
Illustration 1: ABC company is manufacturing Building Bricks and Fire Bricks. Both the products required two
processes: Brick Forming and Heat Treating.
Time requirements for the two bricks Building Bricks Fire Bricks
Forming per 100 bricks 4Hrs. 3Hrs.
Heat Treatment per 100 bricks 3Hrs. 6 Hrs.
Total Cost of the two departments in one month
Forming Rs. 40,000
Heat Treatment Rs. 90,000
Production during the month
Building Bricks 1,40,000 Nos.
Fire Bricks 80,000 Nos.
Prepare a Statement of Manufacturing Cost for the two varieties of Brick. (June 2018)

CAS – 23 - Overburden Removal Cost
The standard deals with the principles and methods of measurement and assignment of Overburden Removal Cost
and the presentation and disclosure in cost statements.
Objective - The objective of this standard is to bring uniformity, consistency in the principles, methods of
determining and assigning Overburden Removal Cost with reasonable accuracy.
Scope - The standard shall be applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Overburden Removal Cost including those requiring attestation.
Definitions
Current Ratio: The ratio of overburden removed to mineral produced in a particular patch of mine during the
year.
Mines overheads: Indirect costs involved in the mining process for rendering services. This relates to the
activities of both Mineral extraction and Overburden Removal.
Mining Plan: It is the plan expected to provide information required to measure the stripping activity with
reasonable consistency.
Overburden: It is the overlying materials generally having no commercial value.
Overburden Removal cost: is the cost incurred to remove the overlying material from the mine site.
Ratio Variance: It is the variance between current ratio and standard /average stripping ratio in terms of quantity
of mineral produced during the period.
Stripping Activity: It is the activity of overburden removal that benefits the identified component of an ore to be
mined by the entity. In other words, the process of mining overburden and waste materials is referred to as
stripping.
Stripping Ratio: Stripping ratio is ratio of excavation of overburden to ore. Generally overburden is measured in
cubic meters and ore in tonnes.
Standard / Average stripping ratio: This is the ratio between the total quantity of overburden to be removed (in
cubic meters) and the total mineral to be extracted (in tonnes) during the Projected life of the project. For
example, 3:1 stripping ratio means that mining one Ton of ore will require mining three cubic meters of waste
rock (overburden). [Hence mining a higher stripping ratio is less profitable than mining at a lower stripping ratio
because more waste must be moved (at a cost per unit volume) for an equivalent volume of revenue generating
ore]
Advance Stripping: Activity whose economic benefit is likely to flow to the entity during the subsequent period
Overburden Removal Cost shall be the aggregate of the following:-
- Direct cost - Like cost of consumable stores, spares like machinery spares, explosives and detonators,
manpower, equipment usage, utilities, payment made directly to contractors and other identifiable
resources consumed in such activity
- Indirect cost - Like cost of resources common to various mining operation including overburden
removal activity such as manpower, administrative overheads, loading and unloading equipment usage
and other costs allocable to such activities.

Treatment of Overburden Removal Cost at different phases of the mining project -
Type of Overburden Removal Cost Computation of Cost

The overburden removal cost attributable Charged to production of ore at the Standard stripping ratio.
to developed area of mine
The overburden removal cost attributable Capitalised as non-current asset. In other words, the cost of advance
to a development phase of a mine area stripping activity whose economic benefit is likely to flow to the
(when it is probable that future economic entity during the subsequent period, shall be capitalised and
benefits to the area will flow to the entity amortised.
in future)
Cost of overburden removal activity Agreed price as per contract price (including duties and taxes and
carried out by outsourcing other expenditure directly attributable thereto). The cost shall also
include the cost of resources provided to the contractor by the
company.
Current ratio = Actual overburden removed (net quantity after due adjustment for opening & closing advance
stripping quantity) / Actual production of mineral
 Subsidy/ grant/ incentive or amount of similar nature received/ receivable with respect to overburden removal
activity if any shall be reduced for ascertainment of the cost of the overburden removal for a patch/ plot to
which the amounts are related.
 Any overburden removal cost resulting from some abnormal circumstances if material and quantifiable shall
not form part of the overburden removal cost. Examples are fire, cave-in, flooding and other similar events of
abnormal circumstances.
 Fine, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form
part of the overburden removal cost.
 Interest & Finance charges incurred in connection with the overburden removal shall not form part of the
overburden removal cost.
 Any change in the cost accounting principles applied for the determination of the overburden removal cost
should be made only if it is required by law or for compliance with the requirements of a cost accounting
standard or a change would result in a more appropriate preparation or presentation of cost statements of an
enterprise.
 Cost of overburden removal activity of each mine shall be computed and considered separately (presentation
aspect)
Assignment of costs
Direct cost of overburden removal shall be assigned to the overburden removal activity.
The cost for equipment shall be assigned in the ratio of machine hours actually engaged for mineral and
overburden removal or any other appropriate method that apportions the cost in an equitable manner.
Administrative overheads and other indirect expenses shall be apportioned to mineral and overburden on the basis
of ratio of actual mineral produced and overburden removed during the period or on the basis of actual machine
hours engaged for mineral extraction, and overburden removal or any other appropriate basis.
Disclosures
a) The basis of determining the overburden removal cost.

b) Where cost of removal is considered on the basis of standard ratio, any variation positive or negative from
the current ratio.
c) Any subsidy grant/ incentive and any such payment reduced from the cost of overburden removal.
d) Credit/ recoveries relating to overburden removal.
e) Any abnormal cost excluded from overburden removal cost.
f) Penalties and damages excluded from the overburden removal cost.
overburden removal cost during the period covered by the cost statement which has a material effect on the
overburden removal cost shall be disclosed. Where the effect of such change is not ascertainable wholly or partly
the fact shall be indicated.

CAS – 24 - Treatment of revenue in cost statements
This standard deals with the principles and methods of classification, measurement, treatment and assignment of
revenue and its presentation and disclosure in cost statements.
Objective - The objective of this standard is to bring uniformity and consistency in the principles and methods for
treatment of revenue in cost statements with reasonable accuracy.
Scope - This standard shall be applied to cost statements which require classification, measurement, treatment,
assignment, presentation and disclosure of revenue including those requiring attestation.
Definitions
By-product: Product with relatively low value produced incidentally in the manufacturing of the product or
service.
Intermediate product: An intermediate product is a product that requires further processing before it is saleable.
Joint product: Products or services that are produced simultaneously, by the same process, identifiable at the end
of the process and recognised as main products or services having sufficient value.
Net Sales Realization: is the revenue from operations net of discounts and indirect taxes.
Other Income: is the income that cannot be classified as revenue from operations. Examples: Profit on sale of
fixed assets and investments; Interest from investments or deposits outside the business; Insurance claims
received, not adjusted against an item of cost
Reporting Period: is the period for which the cost statements are prepared.
Revenue from operations: is the income arising in the course of the ordinary activities of an entity from the sale
of goods or rendering of services. It includes other operating revenue, such as sale of scrap, government subsidies,
or incentives received. Revenue from operations is generally recognised at the net value excluding indirect taxes.
Sometime, revenue is presented at the gross value including excise duty and the excise duty is presented as
deduction from such gross value of the revenue.
Type of Revenue Measurement Criteria

Revenue from sale of goods or services Measured based on the net sales realization during the
reporting period.
Revenue from sale of joint products Measured separately for each main product or service
sold.
Net Sales realization of defectives, second-grade To be adjusted against the cost of production of related
products, rejects, scrap, spoilage, and waste products goods sold. If a by-product is further processed before
sale, sales realisation of such by-product shall be net of
further processing cost.
Other income Shall not be considered in determining profit or loss as
per cost accounts.
Revenue from sale of inputs, utilities, intermediate Shall be adjusted against the cost of purchase or cost of
products, and shared or support services production of the related input, utility, intermediate
product and shared or support service.
Revenue generated from utilization of assets created Shall not be considered in determining profit or loss as
under the CSR program per cost accounts.
- Any subsidy, grant, incentive or any such payment received or receivable to support the current
operations of the entity other than those in the nature of capital grant and other than items of grants
referred above shall be treated as reduction in the related cost.
- Any change in the cost accounting principles applied for the determination of revenue shall be made
only if it is required by law or regulations or for compliance with the requirements of a cost
accounting standard or the change would result in more appropriate preparation or presentation of cost
Presentation
Revenue from sale of goods or services shall be measured separately for each unit or location of an entity for each
type of goods sold or service provided. It shall be sub-classified into revenue from exports, domestic sales,
manufactured goods, operations, and trading activities.
Revenue from sale of goods or services shall be measured separately for sale of each type of by-products,
defectives, second grade products, rejects, scrap, spoilage, or wastes.
Product or service related subsidies, grants, or incentives, received or receivable on sale of goods or rendering of
services shall be part of revenue from operations and shall be identified with each product sold or service
rendered.
Assignment of Revenue:
Revenue for each type of product or service shall be assigned directly to that product or service to the extent it is
economically feasible.
Economic feasibility implies that it is practically feasible to assign the revenue to a particular product or service
with reasonable cost and efforts. Reasonable cost and efforts are matters of judgement.
Disclosures:
a) Revenue from sale of goods or services made to each related party with basis of determining the selling
price;
b) Revenue from by-products and costs of further processing after split-off point, reduced from cost of
relevant product;
c) Amount and nature of any subsidy, grant or incentive received or receivable and included in the revenue.
Any change in the cost accounting principles and methods applied for the measurement and assignment of
revenue during the period covered by the cost statement which has a material effect on the revenue shall be
disclosed. Where the effect of such change is not ascertainable, wholly or partly, the fact shall be indicated.
Disclosures shall be made in the body of the cost statements or as a foot note or as a separate schedule.

Generally Accepted Cost Accounting Principles (GACAP)
GACAP contains a summary of the Cost accounting principles prescribed for business entities in India in
preparing and presenting cost information in the context of general purpose cost statements for statutory reporting
and covered by Cost Audit.
1. It explicitly incorporates the principles already contained in the Cost Accounting Standards issued by the Cost
Accounting Standards Board (CASB) in India without necessarily repeating them.
2. In areas not covered by the standards, it reflects the cost accounting principles found in the Cost Accounting
Record Rules.
3. Where somewhat conflicting principles have been laid down by the CARR in different industries, it will
attempt to harmonize the principles so as to evolve a generally acceptable framework. Where use of alternate
principles are sanctioned by the Rules or where alternate principles are applied in practice in the absence of
explicit guidance in Rules, the alternates will be mentioned with an indication of the preferred practice.
4. Because the Rules were framed at different points of time spread over many years, it is likely that the principles
contained in the Rules and the practice based on them do not reflect current concepts. In such cases, the document
reflects the current concepts.
5. It also reflects the Cost Accounting Principles contained in the Guidance Notes and other publications issued
by ICWAI from time to time.
6. Cost Accounting principles which are gathering wide spread acceptance in Indian Companies for management
reporting even though not adopted for statutory cost reporting (for example, Activity Based Costing) are
mentioned with suitable caveats regarding their lack of applicability for general purpose cost statements for
statutory reporting, where applicable.

Overview of Cost Auditing Standards (CAS)
Standards issued by the Cost Audit and Assurance Standards Board (CAASB) under the authority of the
Council of the Institute of Cost Accountants of India
The CAASB also considers issues requiring interpretation of any Standard. Interpretations or General
Clarifications are issued under the authority of the Council. The authority of interpretation is the same as that
of the Standard to which it relates.
Objectives and Functions
The following are the objectives and functions of the Cost Audit and Assurance Standards Board:
a) To identify areas in which Standards on Quality Control, Assignment Standards, Standards on Auditing and
Standards on Related Services need to be developed.
b) To develop Standards on Quality Control, Assignment Standards, Standards on Auditing and Standards on
Related Services so that they may be issued under the authority of the Council of the Institute.
c) To develop Guidance Notes on issues arising out of any Standard or on auditing issues pertaining to any
specific industry or on generic issues so that they may be issued under the authority of the Council of the
Institute.
d) To formulate and issue Technical Guides, Practice Manuals and other Papers under its own authority for
guidance of Cost Accountants in the cases felt appropriate by the Board.
e) To review the existing Standards, Guidance Notes, Technical Guides, Practice Manuals and other Papers to
assess their relevance in the changed conditions and to undertake their revision, if necessary.
f) To provide Interpretations or formulate General Clarifications, where necessary, on issues arising from the
Standards.
Cost Auditing Standards issued by the Board till date
CAS – 101 - Planning an Audit of Cost Statements
The objective of this Standard is to guide the members in planning for the audit of cost statements so that it is
performed in an effective manner. Audit planning shall also include establishing audit strategy for the conduct
of the audit.
This Standard deals with the auditors’ responsibility to plan an audit of cost statements and other related
information. The auditor shall prepare and document the audit plan. Following shall be considered while
devising a suitable audit plan:-
1) The cost audit framework prescribed under the Companies Act, and Rules prescribed thereunder, as
well as under any other law as applicable,
2) Industry regulators' requirements as to how costs will be handled - Unique features of an industry that
influence audit requirements such as definition of product in the newspaper industry,
3) Reliance that can be placed on the work of financial auditors, other cost auditors appointed by the
entity and internal auditors, such as their attendance in annual stocktaking,
4) State of IT (Information Technology) implementation, whether the entity is using an ERP (Enterprise
Resource Planning) system or internally developed systems and the reliance that can be placed on
them,

5) Statutory timelines for cost reporting, which can be modified by the management for early
completion,
6) Timelines for Board/audit committee meetings, which can set the time limits for completion of audit
work,
7) Resources required and available in terms of manpower, equipment and others and the assignment of
these to specific parts of the work.
8) The Cost Auditor shall develop an audit plan.
9) The audit plan will include the nature, extent and timing of risk assessment, audit procedures and
other activities
10) The Cost Auditor shall update the Overall audit strategy and the audit plan as required during the
course of audit.
11) The Cost Auditor shall document the overall audit strategy, the audit plan and any significant changes
made therein during the audit engagements and the reasons for the changes.
12) In the initial audit, the Cost Auditor shall perform procedures regarding the acceptance of the client
relationship and the specific audit.
13) In case where the audit of the entity for the prior period was conducted by a different audit firm, the
auditor shall communicate with the previous auditor.
CAS – 102 - Cost Audit Documentation
The objective of this Standard is to guide the members to prepare documentation that provides:
a) A sufficient and appropriate record of the basis for the Cost Auditor’s Report; and
b) Evidence that the audit was planned and performed in accordance with CASs and applicable legal &
regulatory requirements.
This Standard deals with the cost auditor’s responsibility to prepare audit documentation for the audit of cost
statements and other cost related information. The specific documentation requirements of other CAAS’s do
not limit the application of this CAS. Laws or regulations may establish additional documentation
requirements. Following is envisaged in this CAS:-
- The Cost Auditor shall prepare audit documentation that is sufficient to enable another competent
person, having no previous connection with the said audit, to understand the results of audit
procedures performed
- The Cost Auditor shall record the discussions of significant matters with client personnel and
outsiders.
- The Cost Auditor shall record any departure from the standard requirement in a Cost Auditing
Standard.
- In documenting the nature, timing and extent of audit procedures performed, the Cost Auditor shall
record the characteristics of the specific items or matters tested, the persons responsible for
performing and reviewing such procedures with relevant dates and extent of review.
- The Cost Auditor shall prepare audit documentation on a timely basis.
- If, in exceptional circumstances, Cost Auditor performs any new or additional audit procedures or
draws new conclusions, after the date of Cost Audit Report, then he shall document such
circumstances and details of such procedures performed.
- The cost auditor shall assemble the audit documentation in an audit file.
CAS – 103 - Overall Objectives of the Independent Cost Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
The objective of an audit of Cost Statements is to enable the auditor to express an opinion whether the Cost
Statements are prepared, in all material respects, in accordance with an applicable Cost reporting framework

and give a true and fair view of the Cost of a product, activity or service. In the case of a Cost Audit under the
Cost Audit Report Rules in India, the objective is to express an opinion on whether the Cost Statements
subject to audit represent a true and fair view of the Cost of production, cost of sales and margin of products
covered by the Cost Audit.
It is the responsibility of the management and where required of the governing body e.g. Board of Directors to
maintain the cost records, prepare the cost statements and the abridged Cost Statement and other information
contained in the Annexure to the Cost Audit Report prescribed by law in India. The standards requires as
under:-
- The cost auditor shall comply with the relevant ethical requirements including those pertaining to
independence in respect of cost audit engagements.
- While conducting an audit, the cost auditor shall comply with each of the Cost Auditing Standards
relevant to the audit.
- The cost auditor shall plan and perform an audit with an attitude of professional skepticism
recognizing that circumstances may exist that cause the Cost Statements to be materially misstated.
- The auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low
level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s
opinion.
- The cost auditor shall exercise professional judgment in planning and performing the audit.
- The cost auditor shall determine whether the Cost Reporting Framework followed by management in
preparing cost statements is in line with the Companies Act and the Rules prescribed thereunder.
- The cost auditor shall not be required to perform audit procedures regarding the entity’s compliance
with laws and regulations governing cost audit in the absence of identified or suspected non-
compliance.
CAS 104 - Knowledge of Business, its Processes and the Business Environment
The objective of this standard is to enable the cost auditor to have knowledge of the client’s business which is
sufficient to identify and understand the events, transactions and practices that, in the cost auditor’s judgment
may have a significant effect on the examination of cost statements or on the preparation of the cost audit
report. This standard requires the following :-
- The Cost Auditor shall have knowledge of Business, its Processes and the Business Environment to
develop a reasonable assurance in order to express an opinion on the cost statements.
- The Entity and Its Environment: The cost auditor should obtain an understanding of the following:
o The nature of the entity, (including its operations covering Business processes, major inputs,
Joint & By-Products and Wastages and major outputs etc) and the entity’s ownership and
governance structure.
o Relevant industry, regulatory, and other external factors including the applicable cost and
financial reporting framework.
o The entity’s selection and application of cost accounting policies.
o The measurement and review of the entity’s performance.
- The Entity’s Internal Control: The cost auditor shall obtain an understanding of internal controls
relevant to the audit.
- Control Environment: The cost auditor shall evaluate whether management has created and
maintained a culture of honesty and ethical behaviour.
- The entity’s risk assessment process: The cost auditor shall obtain an understanding of whether the
- entity has a process for:
o Identifying business risks relevant to cost reporting objectives;
o Assessing the likelihood of their occurrence;
o Estimating the significance of the risks; and
o Deciding about actions to address those risks.

- Cost Information System/ Management Information System: The cost auditor shall obtain an
understanding of the Information System including Management Information System, relevant to cost
reporting,
- Control Activities: The auditor shall obtain an understanding of the control activities, relevant to the
audit.
- IT (Information Technology) Environment and Control: The cost auditor shall evaluate and assess:
o IT Architecture, Systems and programmes in use in the entity;
o Controls on access to data;
o Controls on changes to data in master files, systems or programmes; an
o Integrity of information and security of the data
- Identifying and Assessing the Risks of Material Misstatement: The cost auditor shall identify and
assess the risks of material misstatement at the cost statement level; and at the assertion level
including items of cost, cost heads and disclosures thereof.
Illustration 1: While commencing Cost Audit of a manufacturing company, how the Auditor would assess
the risk of material misstatement? (June 2017)
Solution: Cost Audit Standard 101 explains the situation when the Cost Auditor expresses an inappropriate
audit opinion on the cost statements that are materially misstated. Misstatements are the differences between
the actual figures and the desired amounts, classifications, presentations, or disclosures that, in the Cost
Auditor‘s judgment, are necessary for the cost statements to be presented fairly in all material respects or to
give a true and fair view. For assessment of the risk, the audit strategy is formulated to obtain an
understanding of the entity and its environment, including the entity‘s internal control, to identify and assess
the risks of material misstatement, whether due to fraud or error, at the overall cost statement level and at the
assertion level including items of cost, cost heads and disclosures thereof.
In formulating the overall audit strategy, the Cost Auditor shall consider all the relevant factors stated below.
(a) The cost reporting framework generally prescribed, under the Companies Act and the Rules on the basis of
which the cost information to be audited has been prepared, including need for reconciliation with the
financial reporting framework
(b) Industry regulators‘ requirement as to how costs will be handled
(c) Unique features of an industry that influence audit requirements, such as definition of product in the
newspaper industry
(d) Reliance that can be placed on the work of financial auditors, other cost auditors appointed by the entity
and internal auditors
(e) State of IT (information technology) implementation
(f) Statutory timelines for Cost Reporting
(g) Timelines for Board/Audit Committee meetings, which can set the time limits for completion of audit
work
(h) Resources required and available in terms of manpower, equipment and others and the assignment of these
to specified parts of the work,
The Cost Auditor shall then (i) develop an audit plan which will include the nature, extent and timing of risk
assessment, audit procedures and other activities, (ii) shall update the overall audit strategy and the audit plan

as required during the course of audit, and (iii) shall document the overall audit strategy, the audit plan and
any significant changes made therein during the audit engagements and the reasons for the changes.
In case of deviations from the prescribed accounting and internal control system, if the Cost Auditor
concludes that the deviations are such that the preliminary assessment of risk persists, he/she would amend the
plan, the timing and the extent of his/her plan and the substantive procedure. He/she would report the
deficiencies to the management and if no remedial action is taken, report the same in the Report.

Cost Audit and Management Audit 6.1
Filing of Cost Audit report to MCA [In XbrL Format (as per taxonomy)]
XBRL stands for eXtensible Business Reporting Language. It belongs to the XML (the eXtensible Markup
Language) family of languages. XBRL makes reporting more accurate and more efficient.
(June 2013)
Uses of XBRL
XBRL can be applied to a very wide range of business applications including financial and cost data. XBRL
has applications in the following areas:-
 Reporting for internal and external purposes by an entity involving financial and costing data/
information.
 Business reporting to all types of regulators, including tax and financial authorities, central banks and
governments.
 Filing of loan reports and applications; credit risk assessments.
 Exchange of information between government departments, institutions and banks.
(June 2013)
Key benefits of XBRL
In a nutshell, XBRL significantly increases the quality and efficiency of the information supply chain. Every
fact that is disclosed has a unique XBRL tag associated to it, which acts like a barcode. This XBRL tag
explains the nature of data, the context of data and its relationships with other data. Following are some of the
key benefits of XBRL -
1 Accurate and Quality Data – XBRL validates the data based on the rules and relationships defined
amongst the data elements, which results in obtaining clean and valid data.
2 Seamless Integration – The XBRL data carries along with it, the additional attributes and facts, which
makes the data self-explanatory. And thus the data remains no longer dependent on any application or
platform for interpretation and processing. The XBRL data can be easily integrated into any other
software system.
3 Efficient Business Processing – As XBRL cuts down the time spent on less efficient processes like re-
keying and re-arranging data, the entire business process now becomes more efficient and productive.
XBRL streamlines the preparation of business reports for internal and external decision making.
4 Easy location of data – All the information is identified with a unique XBRL tag and this makes locating
the data from a vast information repository or from a voluminous report very easy and quick. Since related
information is linked (like facts and relevant footnotes), retrieving of information is very easy.
5 Real-time data – Because of automation and creation of accurate and valid data, the processing of data
becomes much faster and so does its dissemination. Thus the information seekers can access the data in
real-time.
6 Better Coverage by Analyst community – The time required for analysis is quite high because the data
is first rekeyed, validated and arranged according to the needs. Since all these activities are no longer
required in XBRL based framework and hence the analyst have time to focus on the analysis of data.
STEPS INVOLVED IN CREATING XBRL INSTANCE DOCUMENTS FOR THE COST AUDIT
REPORT
Step 1: Creation of XBRL instance document - User who wants to create XBRL documents need to
understand the costing taxonomy and the tags available in the costing taxonomy. This understanding of

costing taxonomy makes mapping process easy and efficient. The easiest way to learn about the structure and
content of the costing taxonomy is to navigate the costing taxonomy.
Step 2: Download XBRL validation tool - Mapping of organization’s Cost Audit Report to corresponding
elements in the taxonomy. The process of mapping includes matching of information given in report to
elements included in the taxonomy. Prepares should only consider taxonomy ELRs, relationships and
concepts that are relevant to their specific reports.
Step 3: Load the instance document - Once the elements of the report are mapped with the taxonomy
elements or tags, the next step is to create the instance document. An instance document is a XML file that
contains the actual facts, values and information pertaining to the organization along with the contextual
details like period, unit of measurement; footnotes etc. generated using tags from the XBRL costing
taxonomy. Separate instance documents need to be created for the following:
a) Cost Audit Report of the company

b) of the company
Step 4: Validate the instance document and complete the pre-scrutiny - Once the instance document has
been prepared, it needs to be ensured that the instance document is a valid instance document and all the
required information has been correctly captured in the instance document. The instance document needs to be
validated against the taxonomy as well as the specified business rules for the taxonomy using the validation
tool available on the website of MCA.
Step 5: Convert to PDF and verify the contents of the instance document - Once the instance document
has been successfully validated and scrutinised, the next step is to generate PDF by using ‘Export to PDF’
functionality in the tool to verify the final instance document. This step is essential to ensure that the textual
information entered in the instance document is clearly readable.
Step 6: Submit the instance document to Form CRA 4 and upload it - After the form is correctly filled
and pre-scrutinize, then it needs to be signed [with a valid digital signature of the person authorized by the
board resolution] and then upload the same as per the normal e-Form filing process.
(June 2014)
List of common errors while filing the Form
Following are the few errors that may crop up in the process:
(1) Issue in net connectivity. Please check that your net connection is suitably working to ensure
seamless uploading of the Form
(2) Error creating PDF - Pdf is not getting generated or pdf generated is of zero kilobytes in size. In that
case, we have to check the textual information entered in the instance document and follow guidelines
to correct the instance document and validate and pre-scrutinize again.
(3) Format of the date entered is not as per the valid format. It should be ensured that the date format
is in ‘yyyy-mm-dd’.
(4) 0-100 entered for Percentage Data Type fields. For example: RatioOfOperatingExpenses should be
less than equal to 100%. Only value between 0-1 needs to be entered. For example to report 60 % as
value you need to enter 0.6 in the field.
(5) Wrong currency code like rs entered. For example: Reporting currency should be in INR for –’Net
Operational Revenue Of Product Or Activity Group’. For Indian Currency ‘INR’ needs to be entered.
(6) Mandatory fields have not been entered. Refer Taxonomy and Business Rules for the list of
mandatory elements.

(7) All details for given product or activity group code should be provided. For example: All details
of applicable ProductOrActivityGroupCode [1009]— are required for previous year on role ‘[100340]
Abridged cost statement of product or activity group’.
Objectives of Codification of Accounts (Final December 2014)
1 For apportionment of similar items of expenses on one suitable basis of apportionment.

2 Which is operating from a special economic zone.
3 Computerisation of Cost accounting is made easier with codification of accounts.
4 It will reduce the clerical work in the organization.
5 It facilitates allocation, apportionment and absorption of cost to different cost units or cost centers.
Benefit of having cost related data in XBRL format (Final December 2013)
Government and Regulators require Cost data of different Sectors for policy making. The availability of Cost
data [without compromising on the Confidentiality] in XBRL format enables informed decision making and
for Sectoral Studies. With full adoption of XBRL, Companies would be able to integrate its financial and cost
data across its operational areas and exercise better control on its activities.

Management reporting Issues under Cost Audit1
Performance Appraisal
The objective of preparing a report on performance appraisal is to bring out efficiency in operations by drawing
on sub-optimal operations which can be improved to add value to the Company by providing information on
key performance indicators, risk assessment, mitigation, fuel / energy efficiencies, R&D expenditure and arm’s
length price of product.
Its motive is not only to assess the performance of company but also to suggest remedial/corrective measures to
improve it. The objective is to provide an actionable insight into costs and profitability for the management in
the strategic and operational context.
Steps involved in the preparation of the performance analysis report:
- Identify and understand the key strategies of the company, both prescriptive and emergent strategies
included.
- Choose strategies that have more visible expressions in costs data maintained by the company.
- Identify the activities that were impacted by the strategies selected and also implemented during the
year.
- Analyze the cost implications of xthose activities and link it with the expected results of the strategies.
- Present the evaluation, in a table or any other easily comprehensible format like histogram, chart, graph
etc.
- Give explanatory notes for the terms used, calculations made, and assumption behind the evaluations.
- Finalize the finding after a discussion with the concerned operating executives and then with the
management of the company.
Indicative contents of the report on performance analysis
(i) Capacity Utilization Analysis - Capacity is usually expressed in terms of the final cost unit and
where not so possible in terms of machine hours, people hours etc. The auditor should comment on
how the company responds to the variations in product demand by adjusting its capacity.
(ii) Productivity/Efficiency Analysis - The auditor could understand and analyse the whole chain of
input-processing-output. This analysis, would help auditor to comment upon the performance of the
organisation across products or product groups.
(iii) Utilities/Energy Efficiency Analysis - The importance of conservation of non-renewable energy
needs no emphasis. The performance appraisal parameters for energy and utilities would include
the consumption of fuel for generating energy and then the use of the energy thus produced per unit
of final product.
(iv) Key-Costs & Contribution Analysis - The auditor could provide analysis of the cost information
by highlighting any significant variation therein during the reporting period. Sometimes, these
variations are caused by non-recurring, onetime costs. Suggestions to avoid such variations may be
provided in the report.
(v) Product/Service Profitability Analysis - The auditor is expected to provide a thorough evaluation
to bring out the products and/or services that are contributing more or less to the overall company
performance
(vi) Market/Customer Profitability Analysis – The auditor should suggest suitable action for the
segments that are not performing as per desired targets by introducing campaigns or to pull out of
those segments that are no longer attractive. the auditor could comment on the risks associated with
the markets and customers
(vii) Working Capital & Inventory Management Analysis - the auditor should critically examine the
working capital policy of the company. It is necessary to check whether the funding of these
1
Including case study on performance analysis

components is consistent with the period of requirement. For manufacturing industries, inventory is
the major portion of the current assets. The auditor should evaluate the inventory management
policy which would include, inter alia, procurement policy, stocking policy, inventory valuation
method, inventory records and physical verification procedures.
(viii) Manpower Analysis - The auditor should analyse the figures of manpower productivity, idle time,
overtime worked, absenteeism etc. These factors could be compared with the respective outputs
such as increased production, increased sales etc. The criteria such as sales per person achieved,
production per man hour etc. will add value to the Report on Performance Analysis.
(ix) Other areas – The auditor may include comments on an array of issues in the performance analysis
report, like - Impact of IFRS on the Cost Structure, Cash-Flows and Profitability application of
management accounting tools, Environment and Sustainability, Value Added Analysis etc.
Key Performance Indicators (KPIs) are the variables, in respect of which the goals can be set and
performance can measured. Hence, for evaluation of performance of any organisation or individual the
selection of KPIs must be chosen correctly in tune with the objectives. The KPIs could be:
(a) Q uantitative – these can be financial or non-financial
(b) Q ualitative – these are often lead indicators i.e. they influence future performance
(c) A ctionable – those which can be influenced by enterprise actions or controllable
(d) T rending – those which need to be assessed over a period of time to observe whether they are improving
or not (June 2018)
Illustration 1: Based on the following information in respect of GRINDING MILLS LTD. a concern
manufacturing cement, you as a Cost Auditor, are required to offer your comments on
(i) The performance of the company

(ii) Your suggestions for improvements
Particulars Rated Capacity 80 MT/Hr

2011-12 2010-11
Breakdown (Hrs) 2175 1105
Planned maintenance (Hrs.) 252 435
Power restrictions (Hrs) 1236 1475
Shortfall (there are no order)(Hrs) 792 665
Want of wagons (Hrs) 480 646
Total Stoppage (Hrs) 4935 4326
Total running (Hrs) 3972 4635
Total available (Hrs) 8907 8961
Production during the year (MT) 2,57,380 3,36,950
Hourly Rate Production (MT) 64.80 72.70
Capacity utilization 64.35% 84.24%
Annual Installed Capacity : 400000 MT (June 2012)
Illustration 2: From the following particulars make out a monthly cost sheet of Coke Oven Company Limited
for the Financial Year ended 31.03.2014.

Coal used 7,000 Tonnes @ Rs. 28 per tonne

Coke Produced and Sold (main product) 4,900 Tonnes, Selling Price being Rs. 56 per tonne
Tar produced 280 Tonnes @ Rs. 60 per tonne
Sulphuric, etc. 70 Tonnes @ Rs. 210 per tonne
Benzole etc. produced 67 Tonnes @ Rs. 95 per tonne
Raw Material used Rs. 54,600
Wages paid Rs. 20,500
Repairs and Renewals Rs. 12,000
Salary and General Charges Rs. 7,500
Illustration 3: General Cements Ltd. has a captive generation plant for its cement factory. The following
information is available with regard to the power generation for the month of June, 2014.
Coal consumption 155 tons @ Rs. 500 per ton
Oil 220 litres @ Rs. 39.50 per litre
Water 1500 gallons at 60 per gallon
Stores and other consumables Rs. 4,000
Salaries of generating plant:
2 supervisors each at Rs. 6,500 p.m., 5 skilled workers at Rs. 3,500 p.m., 3 helpers at Rs. 2,200 p.m.
Salaries to boiler house attendant, 8 workers, each at 12,200 p.m.
Cost of generating plant — Rs. 12,00,000 having life of plant 15 years with Rs. 75,000 residual value.
Cost of Boiler Plant — Rs. 5,00,000 having life of plant 10 years with no residual value.
Miscellaneous income received by sale of ash — Rs. 4,000.
Repair and maintenance — Generating plant Rs. 8,500, Boiler house Rs. 5,500.
Share of Administrative Overhead — Rs. 6,250.
No. of units generated during the month — 4,00,000 units.
You are required to prepare the operating cost sheet to calculate the cost per unit of electricity generated
considering no power generated is used by generating plant itself.
(December 2014, Similar December 2016)
Illustration 4: A Special task force is engaged for reviewing the low profit for M/S Ramnagar Textile Mills
Ltd. After the review the Task force gave the following report:
The Company has 1248 looms working two shifts per day. There are 26 sections of 48 looms each. Each section
has 24 weavers and a jobber. Thus there are 1300 direct labourers other than indirect labourers. The production
is 20 lakh metres per month and realised Rs. 10 per metre. The average wage is Rs. 1,200 per month and fixed
cost amounts to Rs. 2,25,000 per month. The product cost is Rs. 6 per metre in addition to Direct wages. The
working time is between 7 a.m. to 12 mid-night comprising two shifts with half an hour interval. The following
suggestions are to be considered:
(i) Labour productivity can be improved by changing lay out of the machines.
(ii) Given the availability of space with the proposed change, only 1008 looms can be reinstalled, with
48 looms in each section.
(iii) Technically a section of 48 looms can be run with 13 weavers, a helper and a jobber. In such
situation the salary per head will increase by Rs. 200 per month. There will be some drop in
production per loom. The company is not in favour of retrenchment of labour.
(iv) The Company can run a third shift between 12 mid-night to 7.00 a.m. with half an hour interval.
However full salary is to be paid for six and half hour work.
(v) Only 20 lakh metres are sold at present at Rs. 10 per metre. Balance production are to be sold in
export market at Rs. 8 per metre.
(vi) An initial stage, the Company can switch to 3 shifts working with 12 sections having 25 direct
labour each and 9 sections having 15 direct labour each. The production in 3 shifts will be 25 lakh
metres. Additional fixed cost will be Rs. 1 lakhs per month.
With the implications of the proposal for the company calculate profitability and advice to Company. (You may
make suitable assumptions) (December 2014, Similar December 2015)

Illustration 5: A Cloth processing unit has two Rotary Printers-P1and P2- running on two shifts, having
normal capacity of 4600 hours. The unit can process two products X and Y which have the following cost
structure:
Per 50 mts. of cloth X Y
Machine Hours required for P1 3 4
Machine Hours required for P2 3 4.5
Processing Fees (Rs. ) 480 560
Direct Materials Cost (Rs. ) 120 150
Particulars Machine P1 Machine P2

Direct Labour/hr. (Rs. ) 48 40
Variable overhead/hr. (Rs. ) 30 22
In case of breakdown of any one machine, the management has to be selective in processing of products.
Assuming that there is no other constraint of order book or costs, arrange the products in terms of
profit. (June 2017)
Illustration 6: During the Energy Audit of Reliable Engineering Ltd., the following figures relating to usage
of power were placed before the Auditor:
Particulars 2016-17 2015-16 2014-15

Total Power consumed (kWh) 2642720 2744360 2393250
Rate per kWh (Rs.) 6.29 5.42 4.90
Total Production (in million kg.) 422.16 416.36 376.08
Compute the necessary productivity measures and (i) Price Variance and (ii) Volume Variance of power
usage during these years. (June 2017)
Illustration 7: Following figures are available for Good Luck Ltd.:
Budgeted Production-880 units, Standard Hours per unit-10, Actual Production-750 units and Actual working
hours-6000 Calculate (i) Efficiency ratio (ii) Activity ratio and (iii) Capacity ratio (December 2013)
Illustration 8: In a manufacturing shop, product P requires 2 man hours and Product Q requires 6 man hours. In
a month of 26 working days of 8 hours a day, 2000 units of P and 1000 unit of Q were produced. The Company
employs 60 workers in the shop and the budgeted man-hours are 108000 for the year. You are required to
workout capacity ratio, activity ratio and efficiency ratio. (December 2014)
Illustration 9: As a Cost and Management Auditor, you are asked to look into the proposed decision to
temporarily suspend operations due to depressed market conditions: Rs. In ‘000
Budgeted Level (per annum) Capacity Utilisation

60% 80%
Direct Material 1,800 2,400
Direct Labour 2,400 3,200
Production overhead 1,260 1,380
Administrative overhead 620 660
Selling & distribution overhead 680 740
Total 6760 8380

The company is likely to operate at 50% capacity only and turnovers expected to be Rs. 49.5 lakhs p.a. Market
Research indicates that the depression will be over in a year and after that they can effect a sale of Rs. 90 lakhs
p.a utilizing 75% of capacity.
If operations are suspended for a year, the following cost will be incurred:
- Fixed cost Rs. 4,00,000

- Settlement with labour force Rs. 3,50,000
- Maintenance of Plant will continue and cost Rs. 1,00,000
- Cost of reopening will be Rs. 1,00,000
Suggest the Management of the following two options:
(i) To suspend production for one year and restart thereafter when market improves.
(ii) To continue production at 50% capacity level.
Illustration 10: A company manufactures two products X and Y. Product X requires 8 hours to produce while
Product Y requires 12 hours. In April, of 22 effective working days of 8 hours a day, 1,200 units of X and 800
units of Y were produced. The Company employs 100 workers in the Production Department to produce X and
Y. The Budgeted Hours are 1,86,000 for the year. Calculate Capacity, Activity and Efficiency Ratio and
establish their inter-relationship.
Illustration 11: CMC Public Health Centre runs an Intensive Medical Care Unit. For this purpose, it has hired a
building at a rent of Rs. 5,000 per month with the understanding that it would bear the repairs and maintenance
charges also.
The unit consists of 25 beds and 5 more beds can be comfortably accommodated when the occasion demands.
The permanent staff attached to the unit is as follows:
(i) 2 Supervisors, each at a salary of Rs. 500 per month.
(ii) 2 Nurses, each at a salary of Rs. 300 per month.
(iii) 2 Ward boys, each at a salary of Rs. 150 per month.
Though the unit was open for the patients all the 365 days in a year, scrutiny of accounts in 2015 revealed that
only for 120 days in the year, the unit had the full capacity of 25 patients per day and for another 80 days, it had
on an average 20 beds only occupied per days. But, there were occasions when the beds were full, extra beds
were hired at a charge of Rs. 5 per bed per day and this did not come to more than 5 beds extra above the
normal capacity on any one day. The total hire charges for the extra beds incurred for the whole year amount to
Rs.2,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the basis of the
number of patients attended and time spent by them and on an average worked out to Rs. 10,000 per month in
2015.
The other expenses for the year were as under: Rs.
Repairs and maintenance 3,600
Food supplied to patients 44,000
Janitor and other services for them 12,500
Laundry charges for their bed linen 28,000
Medicines supplied 35,000
Cost of oxygen, X-ray etc., other than directly borne for treatment of patients 54,000
General Administration charges allocated to the unit 49,550
Required:
(i) If the unit recovered an overall amount ofRs.100 per day on an average from each patient, what is
the profit per patient day made by the unit in 2015.
(ii) The unit wants to work on a budget for 2015-16, but the number of patients requiring intensive
medical care is a very uncertain factor. Assuming that same revenue and expenses prevail in 2016,
in the first instance, workout the number of patient days required by the unit to break even.

Illustration 12: What are the additional references for a Cost Auditor available for Management Reporting?
(June 2018)
Solution: Additional References for a Cost Auditor available for Management Reporting are enumerated
below:
1. Annual Reports of the Company for the current year and the past years.
2. Guidance given by the company to the stock markets.
3. Written policy documents of the company.
4. Company Websites.
5. Website of the industry associations.
6. Macro-economic data from the RBI, Ministry of Finance, Ministry of Commerce and Industry, etc.
7. Management Accounting Tools and Techniques- references and hand books.
8. Cost Accounting Standards issued by The ICAI.
9. Generally accepted cost accounting principles (GACAP) published by The ICAI.
10. Stock market information on prices, market capitalisation, market returns.
11. Minutes of the board meetings to the extent relevant.
12. Personal meetings with the CEO/MD of the organisation and members of the Audit Committee and the
Board.
13. The cost accounting policy of the company.
14. The cost accounting system of the Company-costing methods.
15. GST records maintained by the Company.
16. The monthly MIS reports- particularly exceptional reports.

Practice Questions
Illustration 1: Given below are abridged Balance Sheet and Profit and Loss Account of M/S Festive Cloth
Mills Ltd.
(Rs. In Lakhs)
Balance Sheet 2003-04 2002-03 2001-02
Share capital 345 345 345
Reserves and surplus 302 795 1140
Long term borrowing 687 380 160
Working capital Loan 1563 823 582
Sundry creditors 1258 900 775
Other Provisions 587 325 305
TOTAL 4742 3568 3307
Net Fixed Assets 1168 756 625
Investment 15 15 15
Current assets
Inventory 1025 1013 947
Book debt 210 185 175
Loans and advances 2263 1558 1515
Cash and bank balances 61 41 30
TOTAL 4742 3568 3307
(Rs. In Lakhs)
Profit and Loss Account 2003-04 2002-03 2001-02
Sales 5038 4315 4465
Other Income 428 325 347
TOTAL 5466 4640 4812
Raw material and stores spares 3675 3045 3262
Factory wages 275 232 206
Salaries 428 375 256
Repair and maintenance
Building 7 12 15
Plant and machinery 39 53 47
Vehicles 42 35 20
Depreciation
Building 11 15 17
Plant and machinery 54 45 42
Vehicles 65 28 31
Other overhead excluding salaries and Depreciation
Factory overhead 145 104 82
Administrative overhead 73 60 40
Selling and distribution overhead 88 83 80
Loss for the year (493) (255) (150)
Total 5466 4640 4812
Sales for the year (kgs) 4950896 3836855 3725245
Banker to the company appointed you as a consultant to identify the factors which have contributed to the
continuing losses. Prepare a short note highlighting the factors which have prima facie led the company to
sickness. (December 2014)

Solution:
Working notes: 2003-04 2002-03 2001-02
Sales-Quantity (Kg.) 4950896 3836855 3725245
Sales value Rs. in lakhs 5038 4315 4465
Average Sales realization per Kg. 102 112 120
Raw material stores & spare consumed in lakhs) 3675 3045 3262
Material as percent of a sales value (%) 72.9 70.5 73.1
Direct wages as percent of sales value (%) 5.5 5.4 4.6
Observation:
From the above figures it may be seen that the companies declining profit is not due to market condition as
revealed by the following factors.
(a) The Sales price per kg has been marginally decreasing year to year.
(b) Material Cost has decreasing from year to year.
(c) The Company has been able to control direct labour cost effectively.
(d) The level of production has been maintained and improved over the years.
(e) Inventory and Book debt level have remained within the limit in spite of increase in sales activity.
On the other hand the following factors present negative impact on Profitability and Balance sheet of the
Company.
2003-04 2002-03 2001-02
Long term borrowing 687 380 160
Working capital loan 1563 823 582
Net Fixed assets 1168 756 625
Loans and advances 2263 1558 1515
Depreciation, repairs & maintenance of vehicles 107 63 51
The increase in long term borrowing is reflected in the increase of net assets. But the net assets have not been
utilized in the activity of production. Therefore it may be construed that Long term borrowing utilized in the
unproductive assets or personal assets.
Increase in working capital loan has been utilized in Inventory and Book debts and Loans and advances. Since
the loan has been increased in alarming manner the interest has been increased. This reflects the weak financial
management of the Company.
Conclusion:
(i) It appears that the unit has become sick due to diversion of funds by management to other activities
or for personal expenditure.
(ii) The Net fixed assets have been increased there is no corresponding increase in Profit / Turnover.
Illustration 2: The following information pertains to REACON CEMENT LTD., a manufacturing cement
company for the year that ended as follows:
The year ended March 31. 2013-14 2012-2013

Rated Capacity per Hr (in MT) 80 80
Break down (Hrs) 2,177 1,015
Planned Maintenance (Hrs) 247 422
Power restrictions (Hrs) 1,237 1,481
Shortfall (there are no orders) (Hrs) 792 677
Want of wagons (Hrs) 495 635
Total stoppage (Hrs) 4,948 4,230
Total running (Hrs) 3,888 4,582
Total available Hours 8,836 8,812
Production during the year (in MT) 2,48,844 3,29,928
Hourly Rate of Production (in MT) 64 72

Capacity Utilization (%) 62.21 82.48

Annual Installed Capacity (in MT) 4,00,000 4,00,000
Based on information stated above, you as a Cost Auditor are required to offer your comments on
(i) The performance of the company

(ii) Your suggestion for improvement. (Similar June 2015)
Solution: Reacon Cement Ltd.

(i) Performance of the Company
(a) Rated capacity = 80 MT/Hr : Rated capacity achieved in 2012-13=(72/80)x100 =90%
Rated capacity achieved in 2013-14= (64 /80)x100 = 80%
The capacity achievement as % of rated capacity has declined from 90% to 80% in 2013-14.
Further the Capacity Utilization has gone down to 62.21% in 2013-13 from 82.48% of previous
year; a reduction of 20.27%
(b) From the data available the following observations are noted:-
1. Breakdown hours have gone up from 1,015 hours to 2,177 hrs, an increase by 114.48%
2. Planned Maintenance hrs has reduced from 422 hrs to 247 hrs i.e. by 41.47%
3. Shortfall hrs due to lack of orders has increased from 677 hrs to 792 hrs i.e. by 16.99%
4. The total stoppage hrs. has increased from 4,230 hrs to 4,948 hrs i.e. by 16.97%
5. The total running hrs has come down from 4,582 hrs to 3,888 hrs i.e. by 15.15%
6. The production has come down from 3,29,928 Mt to 2,48,844 Mt i.e. by 24.58%
From the above findings, it can be pointed out that the under utilization of capacity to the extent of
little over 20% can be attributed mainly to:-
- Increased total stoppage hours of 4,948 of 2013-14 as against that of 4,230 hrs in 2012-13 and
- The net increase of 718 hrs (4,948-4,230) is again due to increase of break down by 1,162 hrs ( 2,177-
1,015) in the year 2013-14
(ii) Suggestion:
Therefore, the Company should look into the aspect of proper maintenance, securing sufficient orders to avoid
lost time. Better utilization of capacity can be also be achieved by improving availability of wagons. The
company may also carry out a cost-benefit analysis to have captive source of power.
Illustration 3: ALLIED LTD. has the following Balance Sheet as on March 31, 2014 and March 31, 2013
(Amount in Rs. Lakh)
Year ended March 31 2014 2013

SOURCES OF FUNDS:
Shareholders' Fund 2,972 1,886
Loan Funds 4,644 4,060
7,616 5,946
APPLICATIONS OF FUNDS:
Fixed Assets 4,279 3,600
Cash and Bank 707 684
Debtors 1,914 1,522
Stock 3,560 3,008
Other Current Assets 2,000 1,805
Less: Current Liabilities (4,844) (4,673)
7,616 5,946

The Income statement of ALLIED LTD. for the year that ended is as follows: (Amount in Rs. Lakh)

Sales 26,718 16,778
Less: Cost of Goods Sold 25,152 15,173
Gross Profit 1,566 1,605
Less: Selling, General & Administrative expenses 1,242 782
Earnings before Interest & Tax (EBIT) 324 823
Less: Interest Expenses 256 246
Profit before Tax (PBT) 68 577
Less: Tax 28 230
Profit After Tax 41 347
Required: 1) Calculate for the year 2013-14:
(a) Inventory Turnover Ratio
(b) Return on Net Worth
(c) ROI
(d) ROE
(e) Profitability Ratios
2) Give brief comments on the financial position of company (Final June 2014)
Solution: ALLIED Ltd - Various Ratios for the year 2013 – 2014
(a) Inventory Turnover ratio = Cost of Goods sold / Average Inventory = 25,152/3,284 = 7.66
(b) Return on Net Worth = PAT / Net Worth = (40/2,972) X 100 = 1.35%
(c) ROI = (Net Profit before Interest but after Tax / Average Capital Employed) = (296/6,781) X 100= 4.37%
*NP before Interest and tax = 256 + 40 = 296

** Average capital employed = 7,616 + 5,946/2 = 6,781
(d) ROE: = (PAT available to Equity share holders / Average Shareholder’s Funds) = (40 / 2,429)=1.65%
(2,972 + 1,886/2) = 2,429
(e) Profitability Ratios:
Gross Profit Ratio = (1,566/26,718) X 100 = 5.86%
Operating Profit Ratio = (68+256) =(324 /2,6718) X 100 =1.21%
Net Profit Ratio =(40 /2,6718) X 100 = 0.15%.
2) Comment: There is a substantial decline in Profitability in the current Year from Rs. 823 Lakhs of previous
year to Rs. 324 Lakhs. This is mainly due to huge increase in the operating expenses. There has been substantial
increase in the Interest charges also. During the year 2013-14 both fixed financial expenses and operating
expenses have increased. During current year both operating and financial leverages have been adversely
affected. It can be seen that the company is suffering from a liquidity crisis during the year.
Illustration 4: Chandragupta & Sons Ltd. has received an enquiry for supply of 3,00,000 numbers of Special
Type of Machine Parts. Capacity exists for manufacturing of the machine parts, but a fixed investment of Rs.
90,000 and working capital to the extent of 25% of Sales Value will be required to undertake the job.

The costs estimated as follows:
Raw Materials—30,000 kgs @ Rs. 3.50 per kg.
Labour Hours—10,000 of which 1,500 would be overtime hours payable at double the labour rate.
Labour Rate Rs. 3 per hour
Factory Overhead — Rs. 3 per direct labour hours.
Selling and Distribution Expenses — Rs. 32,000.
Material recovered at the end of the operation will be Rs. 8,000 (estimated)
The Company expects a Net Return of 25% on Capital Employed.
You are Management Accountant of the Company. The Managing Director requests you to prepare a Cost and
Price Statement indicating the price which should be quoted to the Customer. (Final December 2014)
Solution : Statement of Estimated Cost and Price Quotation

Product : Specialised Type Machine Parts Capacity : 3,00,000 Units
Material (30,000 Kgs @ Rs. 3.50)) 105000
Less: Estimated Scrap Value 8000
97000
Labour -
8500 Hrs @ Rs. 3 25500
8500 Hrs @ Rs. 3 9000
34500
Prime Costs 131500
Add: Factory Overhead (10,000 @ Rs. 3) 30000
Factory Cost 161500
Add: Selling & Distribution Expenses 32000
Total Cost 193500
Add: Profit 36900
Sales 230400
Working: Calculation of Sales Let Sales be S

S = Total Cost + 25% of Capital Employed
= 193500 + 25/100 x (90000 + S/4)
= 193500 + 22500 + S/16 Or,
S-S/16 = 216000 Or,
15 S/16 = 216000
S = 230400
Profit = Sales – Cost = 230400 – 193500 = 36900
Working Capital = 1/4th of Sales = 230400 x ¼ = Rs. 57600.
Illustration 5: Selected statistics of Sagar & Company Limited for two years, are given below:
(Amount in Rs. Lakh)
31.03.2014 31.03.2013
Gross profit 36% 331/3%
Stock turnover 20 times 25 times
Average Stock Rs. 38,400 ?36,000
Average Debtors Rs. 87,500 Rs. 1,68,750

Income Tax rate 50% 50%

Net Income after tax as % of Sales 6% 7%
Maximum Credit period allowed to customers 60 Days 60 Days
You are required to:
(i) Prepare a statement of profits in comparative form for all the two years.
(ii) Evaluate the position of the company regarding profitability and liquidity on the basis of
information supplied to you.
(iii) What additional information will you require to evaluate fully the position of the company on the
liquidity fund? (Final December 2014)
Answer:
(i) Statement of Profit of Sagar & Company Limited for the Year ended 31.03.2014 & 31.03.2013
31.03.2014 31.03.2013
Sales 12,00,000 13,50,000
Less: Cost of Goods Sold 7,68,000 9,00,000
Gross Profit 4,32,000 4,50,000
Less: Operating Expenses 2,88,000 2,61,000
Profit before taxes 1,44,000 1,89,000
Less: Taxes 72,000 94,500
Net Profit 72,000 94,500
(ii) The Profitability of the Company is consistently improving. Its liquidity position, judged terms of debtors
and stock turnover ratios, can be said to be very satisfactory. The stock turnover ratio being as high as 20 times.
The debtors turnover ratios are also very high.
For 31.03.2014 = Rs. 12,00,000 – Rs. 87,500 = 13.7 times For 31.03.2013 = Rs. 13,50,000 - Rs. 1,68,750 =
8.0 times
(iii) The amount of current liabilities and current assets, other than debtors and stock, are required to evaluate
fully the position of the company on the liquidity front.
Workings:
(1) Year 2014,
Cost of Goods Sold = Stock Turnover X Average Stock
= 20 X Rs. 38,400 = Rs. 768,000
Sales = Rs. 768,000 X 100/ 64 = Rs. 1,200,000
Net Income = 6% on Rs. 1,200,000
= Rs. 72,000
Therefore, Profit before tax Rs. 144,000
(2) Year 2013,
Cost of Goods Sold = Stock Turnover X Average Stock
= 25 X Rs. 36,000 = Rs. 900,000
Sales = Rs. 900,000 X 100/ 66% = Rs. 1,350,000
Net Income = 7 % on Rs. 1,350,000 = Rs. 94,500
Therefore, profit before tax Rs. 189,000.
Illustration 6: The following are the financial statements of KODIAC LTD. For the year ended March 31,
2015.
Balance Sheet as on March 31, 2015 (Amount in Rs. Lakh)
Equity & Liabilities Assets

Shareholders’ Fund: Non-Current Assets:
Equity share capital 560 Fixed Assets (Net) 2,100

Preference Share Capital 280 Goodwill 280

Reserves & Surplus: 560 Current Assets:
Non-Current Liabilities: Cash at bank 140
Long term debt 1,680 Trade Receivables 700
Current Liabilities: Inventories 980
Trade Payables 840
Outstanding Expenses 80
Provision for tax 200
4,200 4,200
Profit and Loss Account for the year ended March 31, 2015 (Amount in Rs. Lakh)
Sales:
Cash 560
Credit 2,240
2,800
Less: Expenses:
Cost of goods sold 1,680
Administrative, Selling and General Expenses 280
Depreciation 196
Interest on Long-term debt 84 2,240
Profit before Taxes 560
Taxes 280
280
Less: Preference dividend 34
Net Profit for Equity shareholders 246
Add: Reserves at April 1, 2014 364
610
Less: Dividend paid to Equity Shareholders 50
Reserves at March 31, 2015 560
The Ratios of Kodiac Ltd. For the years ended March 31 and their Industry Average ratios and are given below:
Industry
2012-13 2013-14 2014-15 Average
2014-15
Current Ratio 2.54 2.1 2.3
Acid-test Ratio 1.1 0.96 1.2
Debtors Turnover 6 4.8 7
Stock Turnover 3.8 3.05 3.85
Long-term Debt to total
Capital 37% 42% 34%
Gross Profit margin 38% 41% 40%
Net Profit Margin 18% 16% 15%
Return on Equity 24% 29% 19%

Return on Total Assets 7% 6.80% 8%

Tangible Assets turnover 0.8 0.7 1
Interest Coverage 10 9 10
Required:
(1) Complete the financial Ratios Calculation for the year 2014-15.
(2) Analyse the financial performance of the company and
(3) Offer year suggestions to the management for improvements in performance.
Solution: KODIAC LTD.
Calculation of Ratios: (Amount in Rs. Lakh)

1 Current Ratio = Current Assets / Current Liabilities = (140+700+980)/
(840+80+200) = 1820/1120 1.63
2 Acid-test Ratio = Liquid Assets / Liquid Liabilities
= Current Assets - Stock / Current Liabilities - Bank
Overdraft
= (1820-980) / 1120 = 840 / 1120 0.75
3 Debtors turnover = Net Credit Sales / Average Accounts Receivable
= 2240 / 700 3.2
4 Stock turnover = Cost of Goods Sold / Average Inventory = 1680 / 980 1.71
5 Long-term debt to = Long Term Debt / Share Holder's Equity + Debt = 1680 /
total capital 560+560+1680 = 1680 / 2800 0.6
6 Gross Profit Margin = Revenue - Cost of Goods Sold / Revenue = 2800-1680 /
2800 0.4
7 Net Profit Margin = Net Profit / Revenue = 280 / 2800 0.1
8 Return on equity = Net Income / Share Holder's Equity = 246 / 560+560 =
246 / 1120 0.2196
9 Return on total = EBIT (Net Income + Interest + Taxes) / Total Net Assets
Assets - Goodwill = 560+84 / 4200-280 = 644 / 3920 0.1643
10 Tangible Assets
Turnover = Total Turnover / Tangible Assets = 2800 / 4200-280 0.71
11 Interest coverage = EBIT / Interest = 560+84 / 84 7.67
* Value of Intangible assets is excluded:
Evaluation of Financial Performance of the company.

(1) Liquidity position of the company is falling and is lower than industry's average which is evident from
ratios (SL. No. 1 to 4).
(2) The gross profit margin is constant and matches with the industry average. (SL. No. 6 of ratio) but net
profit margin ratio (SL. No. 7) is declining and lower than the industry average. The ratios together
imply that the company's selling and administrative expenses, depreciation and interest charges are
rising.
(3) The decline in the net margin is partly due to rapid increase in debt (SL. No.5) which is substantially
higher than industry average. This increase also explains why the return on equity ratio (SL. No. 8) has
been rising while the return on total assets ratio is increasing which is higher than the industry average
(SL. No. 9). The decline in the net margin can be attributed to the decline in assets turnover Ratio
(SL.No.10).
The impact of the increase in debt and overall decline in profitability are also shown by reduction in the
interest coverage ratio (SL. No.11) which is lower than the industry average.
So, overall financial performance of the Company is not sound or impressive.

Suggestions: The Management is advised to:

(i) Increase production so that cost of production can be cut.
(ii) Reduce long term debt so that interest burden can be declined.
(iii) Take steps to arrest declining trends in both the solvency ratios positions.
(iv) Reduce selling and sales promotion expenses and Administrative expenses.
(v) Improve the efficiency of inventory management.
(vi) Prompt debt collection to increase liquid fund.
(vii) Take steps for arresting the slow -moving and non-moving inventory.
(viii) Finance from long term funds for core current assets according to Principles of sound financial
management.
(ix) Take remedial measure to use optimum capacity in future.
Illustration 7: The following details are extracted from the records of SRIJAN CEMENT LTD. For the year
that ended as follows:

Installed Capacity per Annum (in Tonnes) 200000 200000
Capacity Utilization 87% 95%
Consumption of coal per tonne of output 39% 35%
Consumption of Electricity/Tonne of output (KWH) 4.07 3.98
Capital Employed (Rs. in Lakh) 1,200 1,100
Profit (Rs. in Lakhs) 290 400
Salaries & wages (Rs. in Lakh) 117 98
Production (Tonnes) 174000 190000
Based on the foregoing information you as a Cost Auditor of the Company are required to offer your
observations and suggestions for improvement in performance.
Solution : COST AUDITOR'S Observations and suggestion are as under:
Particulars 2014-15 2013-14

(i) Profit as a % of Capital (Rs. 290 lakh)/(Rs. 1200 Iakh) x (Rs.400 lakh) / Rs.1100 lakh x 100
Employed 100 = 24.17 = 36.36%
It is noticed that the profitability ratio during 2014-15 has considered come down by 12.19% as compared to
2013-14 ratio. Two factors have contributed to downward trend.
(1) Profit has come down from Rs. 400 lakh in 2013-14 to Rs. 290 lakh in 2014-15.
(2) Capital employed has gone up by Rs. 100 lakh in 2014-15 as compared to earlier year (2013-14).
The low profitability position during 2014-15 may be due to the following factors:-
(a) Increase in cost inputs:

During 2014-15 the consumption of Coal per Tonne of output is up by 4% as compared to consumption
of year 2013-14.
In addition, wages and salaries has gone up by Rs. 19 lakh despite reduced production in 2014-15. This
may be due to the following reasons:
o Increase in Rs. 8 lakh due to increments and promotions (assumptions)
o Increase in Rs. 3 lakh due to additional DA paid to workers (Assumptions)
o Increase is Rs. 8 lakh (Remaining) due to employment of new workers (Assumptions)
Additional work needs to be created for these workers.

(b) Reduced Production: During the year 2014-15 production has decreased by 16000 tonnes as compared
to year 2013-14 production.
This may be due to –
o Plant breakdown
o Idle time of workers
o Power failure
o Lower grade of materials
The capacity utilization during the year 2014-15 is also lower by 8% as compared to the year 2013-14
figure due to lack of adequate production planning and control.
(c) Higher Capital Employed in 2014-15:

This may be due to capital additions or higher requirements of working capital. This has not resulted in
increased productivity.
The Management is advised to increase production so that cost of production and sales can be cut,
capital is fully employed and consequently profit can be improved. Unused or idle or unwanted
machinery should be sold out.
(d) Coal Consumption:

The higher consumption of coal during the year 2014-15 by 4% as compared to the year 2013-14.
This may be due to
o High ash content in coal
o Inferior quality of coal used
o Improper maintenance of the boiler
The Management is advised to purchase good quality of coal.
Proper repair and maintenance of the Boiler should be carried out urgently.
(e) Consumption of Electricity: The consumption of electricity in terms of KWH/Tonne of cement has
increased from 3.98 KWH in 2013-14 to 4.07 KW in 2014-15. This is a serious matter which needs
investigation and necessary actions is to be initiated.
(f) Fall in capacity utilization

The installed capacity is 200000 Tonnes.
During the current year (2014-15) the capacity utilization has come down by 8% i.e. there is a loss of
production by 16000 tonnes. This may be due to the following reasons:-
o Major breakdown in the plant
o Frequent power cuts - Inadequate preventive maintenance
o Inadequate production planning and control
o Idle time of labour
o Poor quality of materials
The management should immediately take remedial measure to use optimum capacity in the next year.
Illustration 8: BIDHISHREE LTD. manufactures and sells a single product. During the year 2014-15, it earned
a sales revenue of Rs. 5,040 lakhs based on a 20% profit on selling price. The product requires 30 pieces of
material P and 15 pieces of material Q for manufacture as well as an operation time of 700 hours in the
Machine Shop and 250 hours in the Assembly Section. Overheads are absorbed at a blanket rate of 33-1/3% on
Direct Labour. The factory worked 5 days of 8 hours a week in a normal 52 weeks a year. The statutory
holidays, leave and absenteeism and idle time amounted to 96 hours, 80 hours and 64 hours respectively, in the
year. The other details available from the Cost Accounting records of the company are as under:
Purchase Price Material P 2,400 per piece

Material Q 1,600 per piece
Comprehensive Labour Rate Machine Shop 160 per hour

Assembly 128 per hour

Number of Employees Machine Shop 600
Assembly 180
Finished Product Stock Materials P Materials Q

Opening Stock 200 units 5,400 Pcs. 3,300 Pcs.
Closing Stock 250 units 3,000 Pcs. 6,600 Pcs.
As a Cost auditor of the company, you are required to:
(i) Verify the number of units of the product manufactured (1,450 as per ledger) and sold (1,400 as per
ledger).
(ii) Verify the purchases made of Materials P (Rs. 986.40 lakh) and Q (Rs. 400.80 lakh) during the year
as per purchases ledger.
(iii) Compute the capacity utilisation of Machine Shop and Assembly Section (Final December 2015)
Solution: BIDHISHREE LTD.

As total sales revenue is given, number of units sold can be found out by dividing sales revenue with selling
price per unit.
Selling price per unit

Materials cost:
P (30 Pieces × Rs. 2,400) 72,000
Q (15 pieces × Rs. 1,600) 24,000 96,000
Labour cost:
Machine shop (700 hours x Rs.160) 1,12,000
Assembly (250 hours x Rs. 128) 32,000 1,44,000
Overheads (33-1/3% of direct labour cost) 48,000
Total cost of production 2,88,000
Profit (20% on selling price or 25% of cost) 72,000
Selling price per unit 3,60,000
(i) Verification of product sold and manufactured
Total Sales revenue 5040 lakh
Selling price per unit 3.60 lakh
Number of units of the product (1/2) 1400 units
This is the same as per sales ledger
Add: Difference in opening and closing stock 50 units
Number of units of the product manufactured 1450 units
This is the same as per ledger.
(ii) First find out materials consumed. This is worked out by multiplying production with pieces
required for manufacture of each product.
Materials consumed
-P 1450 units x 30 pieces= 43500 pieces
-Q 1450 units x 15 pieces= 21750 pieces
Materials P Materials Q
(Pieces) (Pieces)
Materials consumed 43,500 21,750

Add: Closing stock 3,000 6,600

Total 46,500 28,350
Less: Opening stock 5,400 3,300
Materials purchased (pieces) 41,100 25,050
Purchase piece per piece (Rs.) 2,400 1,600
Purchases in value (during the year) (Rs.) 9,86,40,000 4,00,80,000
(These are the same as shown in the purchase ledger)
(iii) Practical Available Hours
Hours
Working hours during the year (52 weeks x 5 days x 8 hrs) 2080
Less: Statutory holidays, leave and absenteeism (96hrs+80 hrs+64
hrs) 240
Practical hours available 1840
Machine Assembly
shop section
Practical hours available 1840 1840
Number of employees shop-wise 600 180
Total available hours (1×2) 1104000 331200
Number of the products manufactured 1450 1450
Operation time per number (Hours) 700 250
Production hours used (4x5) 1015000 362500
Capacity utilization (6/3)x100 91.94% 109.45%
Comments: There is an under utilization of Machine Shop. Immediate steps should be taken to correct this
imbalance.
Illustration 9: The following are the Summarised Balance Sheet and Income Statement of SATCON LTD.:
Income Statement for the year ended 31.03.2015
(Amount in lakh)
Sales 3,200
(-) Cost of goods sold 2,620
Gross Margin 580
Less: Selling and Administrative
expenses 80
500
Less: Interest expense 90
Earnings before tax 410
Tax paid 164
Earning After Tax 246
Earnings Per Share (EPS) 3.075
Balance Sheet as at 31.03.2015 (Amount in Rs. lakh)

Equity & Liabilities Rs. Assets Rs.
(1) Shareholders' Fund: (1) Non-current Assets:

(a) Share Capital (a) Net Fixed Assets 1,600

(i) Paid up Capital (80,00,000 Shares of Rs. 10 each
fully paid) 800
(2) Current Assets:
(b) Reserve and Surplus (a) Inventory 800
(i) Retained Earnings 240 (b) Trade Receivables 350
(c) Marketable
Securities 150
(2) Non-Current Liabilities: (d) Cash 100
Long Term Borrowing
(i) Debenture 1,400
(3) Current Liabilities:
(a) Trade payables 360
(b) Bills Payable 160
(c) Other Current Liabilities 40
3,000 3,000
Market Price per share Rs. 15
Industry's average ratios are:
Current ratio 2.4
Quick ratio 1.5
Sales to Inventory 8
Average Collection Period 36 days
Times Interest Earned 6
Profit margin 7%
Price to Earning Ratio 15
Return on total assets 11%
SATCON LTD. would like to borrow Rs. 1,000 lakh from a bank for less than a year.
Required: Evaluate the current financial position of Satcon Ltd. by calculating Ratios that you feel would be
useful for the bank's evaluation.
Solution : SATCON LTD.

Before granting short term loan, the bank should consider liquidity position, profitability position and interest
payment ability of the firm. So let us calculate the requisite Ratios for this purpose:
Industry's
Value of ratio of average
Ratio Formula used Satcon Ltd. ratio Remarks
(A) Liquid Ratio
Current Assets / Current Above
(i) Current Ratio Liabilities (1400/560) =2.5 2.4 standard
Current Assets -Inventory / Below
(ii) Quick Ratio Current Liabilities (600)/560 = 1.07 1.5 standard
(iii) Inventory Below
Turnover Ratio Cost of goods Sold / Inventory (2620/800) = 3.28 8 standard
(iv) Average Trade Receivables × 365 days / (350)/(3200)x 365=
Collection Sales 40 days 36 days 4 days longer
Period

(B) Profitability Ratio

Net Income after tax ×100 / [(246)×100/ 3200 = Above the
(i) Profit Margin Sales 7.69% 7% standard
(ii) Price to Earnings Market Price Per Share / Below
Ratio Earning per share (15/3.075) =4.88 15 standard
(iii) Return on total Net Profit after tax / Total Below
Assets Assets (246)/3000 =8.2% 11% standard
(C) Coverage Ratio
(i) Interest Coverage Profit before interest and tax / (500)/90 =5.56 Near to
Ratio Interest times 6 standard
Comments on the liquidity, profitability and interest payment capacity of SATCON LTD:
Liquidity Position: The current ratio of Satcon Ltd. is little-bit higher than industry's average ratio. So it may
be thought that liquidity position of the firm is sound. But if we look at the quick ratio, we will see that the
position is not at all satisfactory. The quick ratio of Satcon Ltd. is lower than industry's average ratio by as
much as (1.5-1.07)/1.5)= 28.67%. Clearly this has resulted in due to high inventory holding which is around
57.14% of total current assets. That inventory holding is disproportionately high which is evident from
inventory turnover ratio. While the industry's average inventory turnover ratio is 8, it is only 3.28 in case of
Satcon Ltd.. This poor turnover ratio indicates a very inefficient inventory management. The company is
holding either excessive inventory than warranted by volume of production or a huge quantity of slow-moving
and non-moving inventory. The liquidity position of Satcon Ltd. is further strained by 4 days longer debt
collection period than the industry's average.
Profitability Position: The profit margin ratio of Satcon Ltd. is slightly better than industry's average. But the
return on total assets of the company is far below the industry's average. It is only 8.2% while it should be
around 11% as per industry norm. It indicates that Satcon Ltd. is less efficient in utilizing its assets compared to
industry average. So to make the return on total assets at par with industry average, Satcon Ltd. has to either
reduce the investment in total assets or increase sales volume. The price-earnings ratio of Satcon Ltd. is too
lower compared with the industry's average. It indicates that investors' evaluation about the prospect of the firm
is very poor.
Interest Payment Capacity: Interest payment capacity of Satcon Ltd. is satisfactory as the interest coverage
Ratio is near to industry's average.
Conclusion: It appears that if inventory of Satcon Ltd. is properly managed and debt collection becomes more
prompt, the necessary of the short term loan may not exist. Moreover, it should not be lost sight of that current
ratio and quick ratio will be further worsened if this loan is granted. They will be then as follows:-
Current ratio = 1400+1000 / (560+1000) = 1.54
Quick ratio = 1600 / 1560 = 1.03.
So before granting loan bank should consider the above facts very carefully.
Illustration 10: You are the internal auditor of arena manufacturing Ltd. the managing director has asked you
to enquire into the cause of abnormal wastage of raw materials during the month of april. the wastage
percentages for the last few months are: Jan. — 1.3%, Feb. — 1.1%, Mar. — 1.3% and Apr. — 3.9%. How will
you proceed to carry out the assignment?
Solution: The rate of wastage in the month of april is about 3 times than that of the previous months. Hence, it
may be considered as abnormal. In respect of audit of abnormal wastage, the auditor should proceed on the
following lines —
1. General:

(i) Procure a list of Raw materials, showing the names and detailed characteristics of each Raw material.
(ii) enquire whether there is any change which will affect material wastage, e.g. changes in - (i) source of
supply of raw materials, (ii) methods or process, (iii) operating condition of machines, (iV) labour force i.e.
replacement of experienced employees by raw hands etc.
(iii) enquire whether any new production line was taken up during the month in respect of which standard input-
output Ratio is yet to be set up.
2. Wastage figures:
(i) Obtain the standard consumption figures, and ascertain the basis of computation of normal wastage figures.
(ii) examine whether the basis adopted for wastage calculation for the month of april is the same as that adopted
for the other three months.
(iii) see the breakup of normal wastage - (i) transit, (ii) storage, (iii) handling, and (iV) processing.
(iv) Obtain a statement showing break up of wastage figures, (as above) for the four months under review and
compare the results of the analysis for each of the four months.
3. consumption records: Examine the following to find out material variances / deviations if any -
(i) Purchase of various lots,
(ii) Identification of each lot with actual material consumption, and
(iii) Ascertaining actual wastage figures.
4. abnormal process loss:

(i) Material Quality: Examine inspection and testing reports to find out if raw material purchased are of poor
quality or sub-standard. this will be most useful if it is possible to identify the wastage out of each lot that has
been purchased.
(ii) Machine Utilisation: Machine breakdown, power failure, etc. may also result in loss of materials in process.
check machine utilisation statements.
(iii) Inspection: A high rate of rejection in the finished lots may also be responsible for abnormal wastage.
examine the inspection Reports for the inspection carried out on the completion of each stage of work or
process.
(iv) Old Lot Consumption: It is possible that the wastage may have occurred because, the particular lot out of
which issues were made in april was lying in the store for a long time, leading to deterioration in quality, or
because of a change in weather, which may have led to the deterioration.
(v) Previous period comparison: Compare the wastage figures of April this year with that of April last year and
see whether there is any correlation.
5. abnormal Storage and Handling loss: this can happen due to -

(i) Write-offs on account of reconciliation of physical and book-stocks. in case of periodical physical
stocktaking, such write offs will be reflected only in the month in which reconciliation takes place. Accidental,
theft or fire losses in storage. The Auditor should examine such possibilities.
Illustration 11: Suggest some checklists the Cost Auditor should draw for Profitability Analysis in a
manufacturing organization. (June 2017)
Solution: In the analysis of the profitability in a financial year, the Cost Auditor needs to analyze the effects of
change in the selling price and change in the different elements of cost. In the case of service industry, the Cost
Auditor needs be careful as the output units in such sector are not standard and needs bifurcation of each
element of cost and revenue. The usual checklists an Auditor should draw up for the analysis are stated below.
 Sale and Production Records – Analysis of past year‘s data to identify variations
 Reconciliation of Sales with CENVAT Records--to see any discrepancy which has led to wrong
accounting, if any
 Pricing and Discount Structure Policy – analyze the variations to see how far the changes have favoured
the profitability and marketability of products

 Product Cost Statements – Cost data analysis will facilitate discovering variable and fixed cost elements
and their impact on total profitability
 Operational Budget – A study of the budget estimates with that of the actuals will throw light on the
deficiencies and will lead to taking corrective measures
Illustration 12: Grand Manufacture Ltd. received an enquiry for 250000 numbers of special type of machine
parts. Capacity of the company exists for manufacturing the said parts but a fixed investment of Rs.95,000/- and
working capital (to the extent of 35% of sales value) will be required to undertake the job.
The cost estimates are as follows:
Raw Materials 40000 kg at Rs.3.00 per kg.
Labour hours 12000 of which 800 would be overtime payable at double the normal rate
Normal Labour rate- Rs. 3. 00 per hour
Factory Overheads - Rs. 2.50 per direct labour hour
Selling and Distribution Overheads - Rs. 45,400/-
Materials expected to be recovered at the end of the operation- Rs.12,000/-(estimated) The company expects a
net return of 15% on Capital Employed.
As a Management Accountant of the company, you are required to prepare a Cost and Price Statement,
indicating the price to be quoted by the company to the customer and the Working Capital required to undertake
the job. (June 2017)
Solution: Statement of Estimated Cost and Price
Period from------
Product: Special Type Machine Parts
Cost Units: 2,50,000
Cost Items Amount (Rs.) Amount(Rs.)
Direct Material(40000*3) 120000
Less : Material expected to be recovered at the end of the
operation 12000 108000
Direct Labour (normal)[12000-800]*3 33600
Overtime : 800*6 4800 38400
PRIME COST 146400
Add: Factory Overheads: 12000*2.50 30000
FACTORY COST 176400
Add: Selling and Distribution Overheads 45400
Cost of Goods Sold 221800
profit(balancing figure) 26674
Sales( As per working notes) 248474
Selling price per unit Rs. ( the price to be quoted) 0.9939
Working Notes:
Calculation of Total Sales
Let Sales be S
S =Total cost + 15% of Capital Employed
S = 2,21,800 + 15/100 ×(95,000 + 0.35 of S)
S =2,21,800 + 0.15 (95,000 + 0.355)

S =2,21,800 + 95,000 × 0.15 + 0.35 × 0.15 S

S = 2,21,800 + 14,250 + 0.05 S
S - 0.05S = 2,36,050
0.95S = 2,36,050
S = 2,36,050 / 0.95 = 2,48,474 / Sales = Rs.2,48,474
Working Capital required = 35% Sales = 35/100 × 2,48,474 = Rs. 86,966
Illustration 13: The following are the summarised Balance Sheet and Income Statement of Ambica Cement
Co. Ltd. which is selling Cement & Clinkers. The Management wants to know how its financial leverage
appears vis-a-vis the norm of the industry.
Income Statement for the year ended 31.03.2017 (in Rs. ‘000)
Sales 9,800
Cost of Goods Sold 7,460
Less: Administrations & Selling Overheads 750
Interest 280
Tax 330
Earnings after Tax 980
Balance Sheet as on 31.03.2017 (in Rs. ‘000)

Equity & Liabilities Assets
Share Capital 1,500 Net Fixed Assets 6,550
Reserves, Retained Earnings 3,700 Current Assets
Loan from IDBI 1,800 Inventory 1,600
Short-term Loan 1,200 Trade Receivables 1,100
Trade Payables 1,100 Cash 800
Other Current Liabilities 750
10,050 10,050
(December 2017)
Solution: For assessing financial health of the company, it is preferable to analyse
(i) Current Ratio
(ii) lnventory Turnover Ratio
(iii) Return on Total assets and
(iv) Interest Coverage Ratio
(Figures otherwise not stated are in Rs. „000)
1. Current Ratio = Current Assets /Current Liabilities 1.15
(1600+1100+800)/(1200+1100+750) = 3500/3050
2. Inventory Turnover Ratio = Cost of Goods Sold /lnventory = 7460/1600 4.66
3. Return on TOTAL ASSETS = Profit after Tax /Total Assets = 980/10050 9.75%
4. Interest Coverage Ratio = Profit before Tax and Interest/Interest = 5.68
(980+330+280)/280
5. Debt Equity Ratio = Long Term Debt/Shareholders Funds 0.35 :1
=1800/(1500+3700)=1800/5200= 0.35:1 (Favourable)
Analysis and Conclusion:-

- The current Ratio is nearly 1 times which is on an average nearing the industry average in cement
industry.

- The inventory Turnover ratio is good considering low inventory holding compared to the level of
turnover.
- Return on total assets is satisfactory considering high capital base of the company mostly financed by
its own finance.
- Interest coverage ratio is satisfactory since the interest cost is low which indicates that the company
availed partial limit of working capital loan during the whole year.
- The company is financed by its own capital which means financial leverage is low.
Illustration 14: Southern Auto Components Ltd. has received an enquiry for supply of 2,50,000 numbers of
special type of auto components. The Company can execute the assignment provided a capital investment of Rs.
3,00,000 and working capital to the extent of 3 months’ cost of sales are made available.
The costs estimated are as follows:

Raw Materials - @ Rs. 3.25 per unit
Direct Labour Hours - 8,000
Labour Rate - Rs. 4.50 per hour
Factory Overheads - Rs. 4 per direct labour hour
Selling and Distribution expenses - Rs. 30,000
Borrowed funds will be available @11.5% on additional capital outlay.
The company expects a net Return of 25% on Sales. The Managing Director wants a Cost and Price statement,
indicating the price which should be quote
Solution:
Special type Auto Components: 2,50,000 Rs. in’000
Nos
Materials (250,000 @ Rs. 3.25) 812,500
Labour 8000 Hrs @ Rs. 4.50 36,000
Prime Costs 848,500
Factory Over Heads (8000 × 4) 32,000
Factory Cost 8,80,500
Selling and Distribution Cost 30,000
Cost of Sales 9,10,500
Interest @11.5% on 300000 +0.25 × 60,677
910,500)
Total Cost 9,71,177
Profit 323,726
Sales 12,94,903
Working Notes : Calculation of Sales
Sales = Total Cost × (1.00-0.25%)=971177/0.75 = Rs. 12,94,903
Profit = Sales - Cost = 1294903- 971177 = Rs. 323726
Quote Per Unit = 12,94,903 /250000 = Rs.5.18
Illustration 15: TNT Ltd. has received an enquiry for supply of 2,00,000 numbers of Special Type of Machine
Parts. Capacity exists for manufacture of the machine parts, but a fixed investment of Rs.80,000/- and working
capital to the extent of 25% of Sales Value will be required to undertake the job.
The costs estimated as follows:

- Raw Materials - 20,000Kgs @ Rs.2.50 per kg
- Labour Hours- 9,000 of which 1,200 would be overtime hours payable at double the labour rate.
- Labour Rate- Rs. 2 per hour.
- Factory Overhead - Rs.2 per direct labour hours.
- Selling and Distribution Expenses - Rs.23,000

- Material recovered at the end of the operation will be Rs.6,000 (estimated).

The Company expects a Net Return of 25% on Capital Employed.
You are Management Accountant of the Company. The Managing Director requests you to prepare a Cost and
Price Statement indicating the price which should be quoted to the Customer.
Solution: Statement of Estimated Cost and Price Quotation

Product: Special Type Machine Parts. Quantity = 2,00,000 units.
Rs. Rs.
Materials (20000 Kgs. @ Rs. 2.50) 50,000
Less: Estimated Scrap value 6,000 44,000
Labour-
8000 hrs. @ Rs. 2 15,600
1000 (OT) hrs. @ Rs.4 4,800 20,400
Prime Costs 64,400
Add: Factory overhead (9000 hrs. @ Rs. 2) 18,000
Factory Cost 82,400
Add: Selling and Distribution Expenses 23,000
Total Cost 1,05,400
Add: Profit 28,360
Sales 1,33,760
Selling Price / unit = 1,33,760/2,00,000 = Rs. 0.67
Working Notes:
Calculation of Sales
Let Sales be S
S = Total Cost + 25 % of Capital Employed.
S = 1,05,400 + 25/100 x (80,000+S/4)
S = 1,05,400 + 20,000 + S /16
S – s /16 = 1,25,400
15S =1,25,400 x 16
15S = 20,06,400
S = 1,33,760
Sales = Rs.1,33,760
Profit = Sales – Cost = 1,33,760 – 1,05,400 = Rs. 28,360
Working Capital = 1/4th of Sales = 1,33,760 x 1/4 = Rs.33,440.

Basics of Management Audit
Management Audit – Definition and Scope (December 2008 & December 2013)
Management audit is the process of appraising the performance of directors, managers, or in the other words,
appraising the performance of the management of an organisation. It attempts to look into all aspects of the
management performance. Management audit does not concentrate on financial matters alone as in the case of
financial audit. It looks into the efficiency and effectiveness of performance in an organisation.
It covers the entire arena of management operations including organisation, personnel, administration,
manufacturing, marketing, finance, research and development and other areas. The audit is expected to cover
every activity of the organisation undertaken in pursuance of organizational objectives or policies decided by
the Board of Directors from time to time.
Objectives of Management Audit (December 2015)
- Appraise the management performance at all the levels.

- Spotlight the decision or activities that are not in conformity with organizational objectives.
- Ascertain that objectives are properly understood at all levels;
- Ascertain that controls provided at different levels are adequate and effective in accomplishing
management objectives or plans of operations;
- Evaluate plans which are projected to meet objectives,
- Review the company's organizational structure, i.e. assignment of duties and responsibilities and
delegation of authority.
- To ensure optimum utilization on all the resource employed, including money, materials,
machines, men and methods;
- To highlight efficiencies in objectives, policies, procedures and planning;
- To suggest improvement in methods of operations;
- To highlight weak links in organizational structure and in internal control systems and suggest
necessary improvements;
- To help management by providing health indicators and help prevent sickness or help cure in case
of sickness; and
- To anticipate problems and suggest remedies to solve them in time.
Need / Benefits for Management Audit
(i) It helps management in framing basic policies for the organisation and to define objectives.
(ii) In pursuance of the objectives of the organizations, management audit helps in preparing a viable
and achievable plan for the organisation.
(iii) It helps in setting up an organizational framework to implement the plans.
(iv) It assists in designing systems and procedures for smooth operation of the organisation.
(v) It helps in designing and reviewing management information system (MIS) for decision making
to help in coordination, motivation and control of the operations.
(vi) It assists in analyzing SWOT (strengths, weaknesses, opportunities and threats) of the
organisation and assists in marketing the organisation stronger.
(vii) In a developing country like India, management audit through CAG, public accounts committee
and parliamentary committee on public undertakings, has helped the Government in identifying
improper or wasteful use of funds, checking extravagant organization practices and curving
ineffective use of physical resources.

(viii) Indian financial Institutions, banks and Board for Industrial Finance and Reconstruction (BIFR)
have found management audit (called concurrent audit) useful in monitoring sick industrial units
and to help the units in their rehabilitation.
(ix) The Railways of India have subjected their finances to open discussion by public to improve
resource mobilization, reduce cost of operations and conserve their scarce resources which are
main objectives of management audit.
(x) It can help in analyzing social-cost benefit analyses for public projects like dams, power houses,
national highways etc.
(xi) It is essential whenever a unit is planned to be taken-over or an amalgamation or merger with
other unit is proposed.
(xii) Growing number of professional managers, the continuing separation of ownership from
management, the wider distribution of stockholders, increasing competition and sickness in
industry will sooner or later make certified management audit compulsory just as financial audit
has become statutory.
Qualities of management auditor are:
Management audit is systematic, examination, analysis and appraisal of the overall performance of the
organisation. The essential qualities of management auditor are:-
1 Ability to grasp business problems.

2 General understanding of the motive, purpose and objects of organisation.
3 Ability to assist the programme of management.
4 Knowledge about the principles of delegation of authority
5 Understanding different internal control devices, flow charts, flow of work etc.
6 General understanding of all economic and commercial legislations like Company Law, Customs Law,
Labour Law, Tax Laws etc.
7 Ability to prepare reports to various levels of management 8. Capacity to adjust personnel of different
types with tact etc.
The functions of Management auditors are as follows:
1. Ensure that all pertinent information needed for planning reaches higher management
2. Ensure that decisions are based on objective of management.
3. Key functions or operation which are profit making are given maximum attention.
4. He should keep himself knowledgeable with developments, information technology and introduce
latest method of information and communication system consistent with cost benefit studies needed to
improve the system. (June 2008, 2014 & 2015)
Steps of management audit

1. Select an area of operation of management like – Planning / Organising / Staffing / Coordinating /
Communicating / Directing / Motivating / Controlling / Communicating.
2. Establish what should be the objective, standard or target of the operation.
3. Determine whether the actual results meet the standards, norms or targets. If not, why not?
4. Establish what is done to ensure the achievement of the norms, target and standards.
What steps are taken for –
(i) planning
(ii) operations, execution and implementation e.g. sue of up-to-date technology.
(iii) Measurement of performance and controls?
5. Carryout a detailed investigation, collective evidence as well as document for audit findings
6. Report the findings of the audit and make recommendations.
Qualifications of Management and Administrative Auditors.
A management auditor should have broad business experience in allied profession such as accountancy,
statistics, engineering, marketing or administration. The essential qualities of a management auditor are :-
(i) Ability to grasp the business problems

(ii) General understanding of the nature, purposes and objects of the organisation e.g. nationalized or
government controlled organisation etc.
(iii) Ability to determine or assist the progress of the organisation
(iv) Knowledge of the principles of delegation of authority and control and the preparation of different
budgets viz. cash budget, production budget, master budget, etc
(v) Power of grasping and understanding different internal control devices viz., flow chart, flow of
work, analysis of work scheduling, use of computer, etc.
(vi) Sufficient knowledge about engineering statistical techniques, cost and management accounting,
general financial accounting, production planning and control etc.
(vii) General understanding of different laws viz. company laws, tax laws, FEMA, MRTP, and other
economic legislations.
(viii) Sufficient knowledge and experience in preparing various reports for submission to different
levels of management including the top management
(ix) Tactfulness, perseverance, pleasing and dynamic personality.
Management Audit Programme (MAP): Management audit programme is an essential prerequisite to

conducting the audit. It is a plan of action drawn in advance of taking up the audit, and to help the auditor to
cover the entire area of his function thoroughly. (June 2017)
An efficient management audit programme shall comprise the following:
(i) Review of the organisational objectives and plans

(ii) Study of the policies and practices of the management
(iii) A critical review of the organizational structure
(iv) Study of the systems and procedures
(v) Evaluation of operations
(vi) Study of the efficiency of the use of physical resources available
(vii) Exercise of proper management control
(viii) Maintain suitable monitoring system through management information system (MIS)
(ix) Check on adherence to the statutory obligation and
(x) Above all, review the efficiency of manpower handling, which ultimately results in the
organisation’s success. (June 2017)
Characteristics of a good management audit report
a) Pertinence – The audit report should be relevant to the area for which the audit has been conducted.
b) Comprehensiveness – The audit report should cover all the aspects of the chosen area of audit
c) Brevity – The audit report should be brief and to the point.
d) Timeliness – The audit report should be issued in a timely manner so that suitable rectifying actions
may be taken on time.
e) Motivating – Auditor should use positive wordings in the audit report. Eg. Instead of writing that “the
production planning was done inadequately”, it may be written that “the production planning may be
improved by taking the following steps……”
f) Formatting – The audit report must be drafted in a consistent format. Like font type, font size, spacing
etc should be the same in the entire report.

Management Audit and Operational Audit are complementary and supplementary to one another.
Management Audit is that it is wider in scope compared to operational audit. Management Audit is concerned
with the quality of managing, where as Operational Audit centers on the quality of operation. The basic
difference between the two audits is not in method, but in the level of appraisal. In Management Audit, the
auditor is to take his tests to the level of top management, its formulations of objectives, plan and policies and
its decision making. It is not that he just verifies the operation of Control and procedure and fulfillment of
plans in conformity with the prescribed policies. Thus the two audits are complementary and supplementary to
any another. (December 2013 & 2015)
Features of Different Types of Audits
The Table below brings out the distinguishing features of different types of audit carried out in an
organization: (June & December 2011)
Financial, cost and other

Basis Management Audit Internal Audit
audits
Assisting Management to Specific under statutory
Expectations Appraising management identify problems and other’s directions
Friend, Philosopher and
Attitude guide Policeman/judge Watch dog/judge
Outside team or Specially designated
Agency management Internal or External persons
Force Voluntary Statutory in some cases Statutory/Voluntary
Complete Management or
Area specific problems Mainly past/ procedural Specific objectives
Effectiveness/ quality of Quality of procedures
Evaluation management/Policies Operations/data Specific information
Period
covered Past, present and future Past and present Mainly past
Procedures Flexible Structured Highly structured
Reporting
level Higher Operational Designated
Current and immediate
Time span Futuristic Current and immediate past
Periodicity Regular Regular Annual
Differentiate between:
Basis Management Audit Operational Audit

Meaning It seeks to appraise the efficiency of It is a review of the performance of only the
management at all levels in the middle and lower level of management.
organization
Coverage It covers goals and objective of It covers all the operations of the business
management
Scope Unrestricted Restricted
Period Determined by management Continuously carried out
Appointment By management By management
Reporting To management To management
Remuneration Fixed by management Fixed by management
(June 2003, 2011 & 2014 and December 2012)

Basis Financial Audit Operational Audit

Purpose Concerned with the opinion that whether the emphasizes on effectiveness and
historical information recorded is correct or efficiency of operations for future
not performance.
Area Restricted to the matters directly affecting the Covers all the activities that are
appropriateness of the presented financial related to efficiency and effectiveness
statements of operations directed towards
accomplishment of objectives of
organization.
Reporting The financial audit report is sent to all stock the operational audit report is
holders, bankers and other persons having primarily for the management.
stake in the Organisation.
End Task The financial audit has reporting the findings the operational auditing is not limited
to the persons getting the report as its end to reporting only but includes
objective suggestions for improvement also.
(Final June 2013)
Sample checklist for conducting a management audit
1. How is the production plan prepared? Is it based entirely on market forecasts, or does it also take into
account limitations of materials, personnel and finance?
2. Are the product-mix decisions based on optimum profitability? What is the proportion of standard products
and tailor-made items?
3. Whether all infrastructure like machinery, materials, manpower and money have been assured at the
scheduled time for uninterrupted production.
4. Are there any constraints in achieving maximum capacity utilization? Are there any imbalances in the
plant? If so, what steps are being contemplated to set right the imbalance?
5. Is it possible to subcontract some jobs to increase production capacity or maintain production in times of
power-cuts etc.?
6. What is the percentage of scrap, waste and rejects? Is it reasonable?
7. Is the idle time being monitored regularly? Is it being analysed reason-wise? How much of it is due to
machinery breakdown which is controllable by production department?
8. Is there excess or shortage of manpower? How is the control exercised – time & motion study, incentives,
labor budgets or any other means?
9. Is there any wastage in consumption of utilities like power, fuel, steam, compressed air, etc.?
10. How effective is the material handling system? Are there any avoidable movements of materials?
11. What is the system for preventive maintenance? If the in-house maintenance capability is not adequate, are
there annual maintenance contracts for all important items of plant and machinery?
12. How is the control exercised on inventory of stores and spares?
13. What is the procedure to handle breakdown emergencies?
14. Are all statutory requirements in regard to safety measures complied with?

15. Are history cards available for all plant and machinery giving details of downtime, replacement of parts,
etc.
16. Does the system provide for flexibility or change of production schedules to execute urgent orders or
changes in the product mix? (June & December 2015)

Management Audit in different functions
Corporate Objectives are the overall objectives of the organization that influence the direction of corporate
strategy. In other words, what the organization seeks to achieve is corporate objective. These are the specific,
realistic and measurable aims which an organisation plans to achieve. E.g. The corporate objectives of
‘General Electric Company’, USA are:
“To become the most competitive enterprise in the world by being number one or number two in market share
in every business the company is in.”
The corporate objectives of ‘Apple Computers, USA are:
“To offer the best possible personal computing technology, and to put that technology in the hands of as many
people as possible.”
Corporate strategy or policy is the strategy that determines the means for utilizing resources in the areas of
production, finance, research and development, personnel, and marketing to reach the Corporate Objectives.
These policies are laid in conformity with the objectives of the organization and are generally laid down by
top management and the board of directors.
Corporate Branding is the process of creating and maintaining a favourable reputation of the company and its
constituent elements. It is an important organizational resource that enables to create, strengthen and sustain
competitive advantage. It is a strategic asset that creates competitive advantage and favourable climate for the
survival and development of an organization. The purpose of corporate branding is to:
 Make the organization known, as unique, distinct and credible in the mind of potential customers.
 Facilitate the building of relationships and trust.
 Portray the benefits of the organization to the customer.
 Embody and convey the value system of the organization.
Corporate Image: The term “Image” indicates an idea or procure formed in the mind of a person about an
individual or an institution. Corporations, like individuals, consciously build up images in the minds of the
people with whom they come into contract. In developing a ‘Corporate Image’, an enterprise has to ensure an
overall consistency, as regards the quality of the products, the ethics of its management, employee relations,
attitudes towards customers, quality and service to customers etc. the Public have different perceptions of
“Corporate Image”.
 Customers measure it by the product quality, prompt and courteous after sales service, regularity in
maintaining supplies; etc.
 Shareholders, measure it by the consistency in financial performance and prospects of growth.
 Supplier measure it by the company‟s liquidity and ability to honour commitments.
 Banks and Financial Institutions measure it by the financial health, net worth and history of servicing
debts.
 Government looks at it from the point of view of revenue generation and as an honest tax payer.
 Employees look for steady career growth and smooth Industrial Relations.
(Final June 2013 & 2014, December 2015, December 2016)
Evaluation of Corporate Image (Final December 2015, December 2016)
Evaluation of Corporate Image is a very complex process and it involves a critical examination of events and
trends concerning business environment-both internal as well as external. The following are the steps to
evaluate Corporate Image
 Prepare a list of desirable attributes

 Group them functionally and specify the qualifications

 Assign weights to each attribute based on their relative importance.

 Involve experts in the respective fields in rating the qualifications and attributes- based on facts,
judgments and interpretations.
 Summarise the rating under the selected groups and present a composite evaluation to the
management. The summary should through light on what the company has been able to do for itself
and for the public in general, represented by the six group- identified earlier.
Corporate Culture refers to a corporate’s values, beliefs and behaviours on the basis of which people
interpret experiences and behave. In this era of globalization, successful companies have a customer driven
corporate culture. In simple language, corporate culture is the operating working environment and is shaped
by the way people conduct their work, the way customers are treated and served, the way workers interact
with each other or their supervisors or the way people present themselves.
It is the management’s responsibility to ensure the building up of a corporate culture comprising of :
 Commitment to honest productivity

 Planned performance and growth
 Informative, informing and informed, organization
 Consideration for others in partnership with the organization
 Participative management
 Good employee relations
 Good decisions and timely action
 Quality consciousness
 Mutual trust
 Futuristic outlook
 Helpful nature, inter-institutional and towards neighbourhood
 Cleanliness, timeliness, truthfulness, open home, orderliness, humility, creativity, learning, and
sense of values.
Corporate Services: Corporate Services are the support infrastructure of a company. The activities in such
areas are stated below.
 Combine or consolidate certain enterprise-wide needed support services provided based on specialized
knowledge, best practices, and technology
 Serve internal (and sometimes external) customers and business partners
 co-ordinate the diverse organizational units and help them to focus on organizational goals
 exploit resources and develop core competencies that enable an organization to keep its edge over its
industry competitors
 combining operations with another competitor in the same industry to increase competitive strengths
and lower competition among the industry rivals
The business world is now becoming increasingly information intensive and complex and, therefore,
companies have begun to incorporate web-based services into the work place. These include public relations,
customer assistance or call centers, training, engineering, human resources and procurement, etc., to create
new business value and help the company function more effectively by improving the internal processes,
managing the customer relationships and extending the organization. The benefits of these services extend to
core business areas in form of (a) reduced costs, (b) less inventory, (c) less working capital requirements, (d)
improved procurements and higher profits, and (e) higher efficiency and productivity of the employees as new
technologies can introduce an array of new possibilities with powerful computers and integration of database
with web technologies. (June 2017)
Corporate Services Audit : The term “Corporate Services” refers to the activities that combine or consolidate
certain enterprise-wide needed support services, provided based on specialized knowledge, best practices, and
technology to serve internal (and sometimes external) customers and business partners viz. employees,
shareholders, community, fellow businessman and Government.

Management auditors study separately and properly evaluate after critical examination of different aspects of
services and their extent that have been satisfactorily rendered by corporate body and of evaluation of degrees
of responsiveness and awareness on the part of such enterprise.
In other words the scope of corporate services audit extends to the critical examination of the different aspects
of services and the extent to which the corporate body has rendered satisfactory services.
The areas of Corporate Service Auditors are:
1) Consumers – quality goods in right quantity at right price, place and time
2) Employees – pay, training, safety, welfare, industrial relations, job security etc.
3) Shareholders – safety of investments and satisfactory returns, appreciation of investment
4) Community – social cost and social benefit, public relations
5) Fellow businessmen – business ethics and fair trade dealings
6) State / Government – compliance of laws, fair trade practice, timely payment of taxes
The concept of corporate services audit is that its appraisal should consider the level of contribution a business
entity makes to society and its environment towards raising the quality of life through better product quality
and services rather than profit maximisation. The corporate services audit thus attempt to distinguish between
the end and means of business and provides a new dimension to the concept of audit approach. In corporate
services audit, the auditor checks the company’s response to different social needs.
(December 2008 & 2012 and June 2011, 2014 & 2017)
Corporate development audit is an independent objective study of an organization’s capabilities. It aims at

identifying strengths and weaknesses and moving toward state-of-the-art performance. A Corporate
Development Audit gives a comprehensive picture of the status of corporate development effectiveness and
highlights developmental needs. (June 2018)
Checklists in the areas of Corporate Development Audit:

(June 2018)
A. Check list on Corporate Planning:
a) Whether SWOT Analysis has been made?
b) What are the corporate strengths and weaknesses in relation to price, quality, market share,
distribution network, after-sales services, technology improvement, corporate structure and qualities
of members?
c) What are the opportunities and threats in relation to rivalry among the existing firms, threat of new
entrants, threat or opportunity of technical know-how, and strategy of suppliers?
d) How were the threats overcome and opportunities availed of in the past?
e) Whether the "corporate image} is going to improve in the near future?
f) What specific techniques are applied by the management for corporate planning (long term and short
term)?
g) Whether the corporate objectives and goals are clearly defined?
h) Whether the corporate planning premises and plans have been drawn up based on adequate
information?
B. Check list on Corporate Objectives:

a) Whether the corporate objectives are clear and explicit?
b) Whether the different component of the enterprise have separate objectives?
c) Whether these objectives are clearly defined?
d) Is there sufficient flexibility in the organizational design in the form of the responsiveness to changes
taking place from time to time?

C. Checklist on Delegation of Authority:

a) Whether there are clear lines of authority from top to bottom in the corporate enterprise?
b) Whether accountability has been properly coupled with corresponding authority?
c) Whether responsibility and authority in each position are clearly defined in writings?
d) Whether the number of levels of authority have been kept minimum?
e) Whether the duties assigned to the subordinates are indicative of the exact activities expected of
them?
f) Whether responsibility via Delegation of Authority has been created among the subordinates to
complete the given task?
g) Whether the methods of Delegation of Authority are Compatible with the organization structure?
D. Checklist of span of Management

a) Whether span of Management has been recognised in the organization?
b) Whether everybody in department reports only to one supervisor?
c) Whether the accountability of the higher authority for the acts of its subordinate is in accordance with
the current practices?
d) Whether the corporate management recognizes the following factors that affect the span of
Management?
i. Degree of interaction between the units or the personnel being supervised
ii. The incidence of new problems in any department
iii. The extent of standard procedures adopted
iv. The extent of non-managerial responsibilities
e) Whether the different activities and functions are grouped together in order to:
i. Obtain the most effective use of men and facilities
ii. Meet the objective in the optimum way
iii. Run the operation most economically
iv. Whether responsibilities are grouped, wherever possible, so that the overall control of a function
can be established so as to hold the superior manager accountable?
Personnel Management is a vital aspect of corporate development is systematic training of managers and
specialists to fill present and future needs for the company. It also helps further individual growth to
ultimately facilitate corporate growth and expansion. Therefore, personnel management is concerned with
managing people at work. The various components of personnel management are as under:-
(a) Organization review and analysis : Continuous review and analysis of organization’s operation may be
necessary in order to determine and develop appropriate work structure, roles and responsibilities, inter and
intra-department relationship, and levels of authority.
(b) Manpower, planning, recruitment and selection : Forecasting and planning is essential to an organization
for ascertaining sufficient number of qualified personnel for manning its operations.
(c) Manpower training and development : Appropriate methods and techniques of training and development
may be adopted. Proper facilities and opportunities are to be provided for personnel to enable them to acquire
necessary skills and knowledge to perform the jobs for which they are employed.
(d) Performance appraisal : There should be proper measuring, rating and evaluation of performance of
personnel, guiding employee development and promoting motivation, communication and equity.
(e) Employee remuneration : This function includes developing and administering appropriate system of
remuneration including job evaluation, wage and salary structure, incentive payments, fringe benefits and
non-financial rewards.

(f) Employee services : There should be satisfactory services relating to the safety, health and welfare of all
employees, including social security plans and community development programmes.
(g) Administration and records : This includes designing, implementing and controlling of adequate records
and administrative procedures to provide useful and pertinent information for planning purposes and for the
documentation for all personnel in service.
(h) Industrial relations : It includes establishing appropriate procedures for the resolution for personnel and
institutional differences by means of appropriate measures and machinery, e.g. standing orders, grievance
procedures, conciliation, collective bargaining, and joint consultation.
(i) Auditing and research in manpower management : These are the responsibilities of personnel management,
which call for the attention of a management auditor.
Consumer services audit –A customer is the most important person for business. The primary responsibility
of a business enterprise towards consumers is to make available the products of the right qualities at the right
time, in right quantity, at the right place and right price. The consumer services audit critically examines and
apprises management on these aspects of services. Corporate Services include public relations, customer
assistance or call centres, training, engineering, human resources and procurement etc. to create new business
value. It helps the company function more effectively due to improved internal processes, managing customer
relationships and extending the organisation.
These services co-ordinate the organisation units and helps them to focus on organisational goals by
exploiting resources and developing core competencies. It helps organising to stay competitive. It may also
involve co-ordination with rivals. (December 2008 & 2011)
The following are some of the important aspects/questions, which the auditor must address while doing a
consumer services audit:
 Do the products manufactured meet the needs of the customers of different classes, different tastes and
different purchasing power?
 Are the product prices reasonable and consistent with the quality variations, efficiency variations and
reasonable profit margin?
 Is the share of „added value‟ through increased profitability reasonably passed down to the consumer?
 Whether after-sales service, spare parts facility, etc., enable the customers to derive maximum use and
pleasure?
 What are the efforts made to constantly improve the product and its use value, esteem value? (June 2013)
Corporate development audit is a comprehensive task to assist the corporate management in various aspects
of development through a process of systematic review and evaluation of long-term strategies of the company.
Such corporate development audit assures that –
(a) The various factors and forces constituting a corporate enterprise are the right kind and quality.
(b) Communication remains the key to the functioning of an enterprise.
(c) The pattern of departmentalization in an enterprise adopted in the past and proposed for the future for
dealing with multidirectional responsibilities is fully responsive to circumstances and business environment.
(d) The personnel problems are handled appropriately considering the overall objectives of development of
the corporate enterprise.
(e) The responsibilities of planning, coordination, motivation and control at functional management levels are
discharged in proper spirit.
Environmental Audit (December 2008 & 2009, June 2013)

Environmental audit refers to the process of ensuring whether a company is taking active steps to control the
pollution (Air, Water, Noise, Smell, Thermal, Visual, Climate, Radiation, Soil/Land) which affects its
environment and its efficiency to conserve environment. Waste management records to be maintained and
annual returns to be submitted under Hazardous Waste (Management and Handling) Rule, 1989 may be
audited by Practicing Cost Accountants.
Conservation of environment extends not only to control pollution of air and water but also control of noise
level, prevention of denudation of forests, maintenance of ecological balance etc. In India the following
legislations give statutory recognition to this awareness:
i. Forest Conservation Act, 1980

ii. Water (Prevention and Control of Pollution) Act, 1974 & 1981
iii. Environment Protection Act, 1986
iv. Hazardous waste (Management and Handling) Rule, 1989
v. Air (Prevention and Control of Pollution) Act, 1981
vi. Motor Vehicle Act, 1991 etc.
Marketing audit is an independent examination of the entire marketing effort of a company, or some specific
marketing activities covering objectives, programme implementation, and organisation for purposes of
determining what is being done, appraising which is being done, and recommending what should be done in
future. (June 2011 & 2014)
Features of Marketing Audit (June 2011 & 2014)
- It is carried out periodically at regular intervals and not only when the company is facing marketing
problems
- It is the appraisal of the entire system and the process of marketing, after taking into account all the
elements of the marketing operations
- It evaluates a total appraisal of the marketing efforts of a company
- It reviews the formal lines of authority and responsibility, delegation of authority, status of marketing
head and its staff, adequacy of the personnel, proper manning of key tasks and assignments thereof
Marketing audit covers the following broad areas: (June 2014)
- Objectives : Marketing objectives should be clearly established

- Programme : The auditor should carry out an appraisal for the programme which the company has
laid down for achieving the objective
- Implementation : The auditor will take up the examination of the company’s implementation of the
marketing programme
- Organisation : A suitable organisation assists in a success of marketing plan.
Corporate Governance - Corporate governance is all about “promoting corporate fairness, transparency and
accountability in an organisation. It involves a set of relationships between a company’s management, its
board, its shareholders and other stakeholders. Corporate Governance also provides the structure through
which objectives of the company are set, and the means of attaining those objectives and monitoring
performance are determined. It is a system by which companies are directed and controlled by the
management in the best interest of the shareholders as well as others with greater transparency and better and
timely reporting. (December 2011 & 2012 and June 2014)
Objective of Corporate governance – It is needed to create a corporate culture of consciousness,

transparency and openness. It refers to combination of laws, rules, regulations, procedures and voluntary
practices to enable companies to maximize shareholders’ long-term value. It should lead to increasing
customer satisfaction, shareholder value and wealth.

The following are the items to be included in the Report on Corporate Governance in the Annual Report of the
Company: (December 2010 & 2006; June 2015 & 2017)
i) A brief statement on Company’s philosophy on Code of Governance

ii) Board of Directors
- Composition and category of Board of directors
- Attendance of directors in board meetings
- Number of board meetings held and dates on which they were held
iii) Audit committee
- Brief description of terms of reference
- Composition of name of members and chairperson
- Meetings and attendance during the year
iv) Remuneration Committee
- Description of terms of reference
- Composition of name of members and chairperson
- Meetings and attendance during the year
- Remuneration policy
- Details of remuneration to all the directors
v) Shareholders committee
- Name of non-executive director heading the committee
- Name and designation of compliance officer
- Number of shareholder’s complaints received so far
- Number not solved to the satisfaction of the shareholders
- Number of pending complaints
vi) General body meetings
- All details
vii) Disclosures on -
- Significant related party transactions that may have potential conflict with the interests of the
company at large
- Non-compliance by company, penalties, strictures, imposed on company by SEBI on any
matter related to capital markets, during last three years
- Whistle blower policy and affirmation that no personnel has been denied access to the audit
committee
- Details of compliance with mandatory requirements and adoption of the non-mandatory
requirements of this clause
viii) Means of Communication
- Quarterly results
- Newspapers wherein results normally published
- Any website, where displayed
- Whether it also displays offi cial news releases; and
- The presentations made to institutional investors or to the analysts.
ix) General shareholder information
- AGM : Date, time and venue
- Financial year
- Date of Book closure
- Dividend Payment Date
- Listing on Stock Exchanges
- Stock Code
- Market Price Data : High., Low during each month in last fi nancial year
- Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc.
- Registrar and Transfer Agents
- Share Transfer System
- Distribution of shareholding

- Dematerialization of shares and liquidity

- Address for correspondence
Key aspects of CII (Confederation of Indian Industries) Code in respect of corporate governance:
(December 2011)
a) Annual operating plans and budget together with updated long term plans
b) Capital budgets, man-power and overheads
c) Quarterly results for the company as a whole and its operating division for business segments
d) Internal audit reports, including cases of theft and dishonestly of a material nature
e) Details of any joint venture or collaboration agreement
f) Transactions that involve substantial payment towards goodwill, brand equity or intellectual
property
g) Labour problems and their proposed solutions
h) Fatal serious accidents, dangerous occurrences and any effluent or pollution problems
i) Default in payment of interest or non-payment of the principal on any public deposit, and/or to
any secured creditors of financial institutions
j) Recruitment and remuneration of Senior Officers just below the Board level, including
appointment or removal of the CFO and the Company Secretary
k) Show cause, demand and prosecution notices received from the revenues authorities which are
considered to be materially important
l) Quarterly details of foreign exchange exposure and the steps taken by management to limit the
risk of adverse exchange rate movement, if material
m) Defaults such as non-payment of inter-corporate deposits by or to the company or materially
substantial non-payment of goods sold by the Company
Energy Audit (June 2006, 2007, 2014, 2015 & 2017)
An Energy Audit has been defined as an inspection, survey and analysis of energy flows in a building, process
or system with the objective of instituting energy efficiency programs in an establishment. It consists of
activities that seek to identify conservation opportunities preliminary to the development of an energy savings
program. In other words, an energy audit is conducted to seek opportunities to reduce the amount of energy
input into the system without negatively affecting the output(s). An energy audit also seeks to prioritize the
energy uses according to the greatest to least cost effective opportunities for energy savings. It also involves
suggesting ways and means of reducing wastage of energy by adopting new measures.
In simple words, Energy audit means monitoring the energy efficiency of different equipment and process in a
plant and looking into way by which the total sum of energy consumed can be cut down without affecting
production or its efficiency. An energy-cum-environment audit is an analogous step of a programme aimed at
conserving energy in an energy consuming facility and keeping its impacts on the environment within
acceptable limits.
The following are some of the key functions of the Energy Auditor: (Final June 2014, 2015 & 2017)
(i) Quantification of energy costs and quantities.

(ii) To devise energy database formats to depict to correct picture-By product, department or
consumer.
(iii) To correlate trends of production or activity to energy cost.
(iv) To focus on the possible sources for conserving energy.
a. Steam Generation
b. Steam Distribution
c. Steam Utilization
d. Electrical Energy Utilization
e. Total Energy System

f. Diesel Exhaust Recovery
While performing the aforesaid key functions, the energy auditor is required to carry out the following
activities:
(i) To analyse the historical energy consumption and cost data.

(ii) To conduct preliminary energy audit with the objectives to identify:
(a) major energy consuming equipment and process:
(b) obvious inefficiencies and energy wastes ; and
(c) priority areas for further detailed investigation ,
To conduct detailed technical and economic analysis of energy efficiency measures involving large efficiency
measures involving large capital investment or long payback periods.
Productivity Audit/Efficiency Audit
The Productivity audit is basically an analysis of the productivity of the resources deployed by any
organization. It is generally done to generate information about the status of productivity in the organization
for the purpose of determining the scale of efficiency and effectiveness of ‘resource utilization’.
Twin objectives of Productivity Audit
a) to attain optimum result, and

b) to improve on the benchmarks.
This audit would generally comprise –
(a) comparison of expected returns on utilization of the resources vis-à-vis the actual returns;
(b) comparison of optimum returns on utilization of the resources vis-à-vis the actual returns; and
(c) the steps taken to improve benchmarks of returns and the utilization.
(December 2017)
Productivity audit is done by using the following ratios–
(a) Ratio analysis – Return on capital employed – Return on sales – Turnover ratios of fixed assets, current
assets, inventories, category-wise debtors etc.
(b) Capacity utilization of plant, machinery and equipment against available capacity.
(c) Productivity analysis of man (labour) hours in time and cost.
(d) Material consumption against norms and benchmarks.
(e) Capital employed per capita
(f) Capital employed per unit of product
(g) Gross profit to capital employed
(h) Net profit to capital employed
(i) Debt equity ratio
(j) Net worth and long-term debts to gross fixed assets
(k) Net worth and long-term debts to net fixed assets

(l) Debts to fixed loans
(m) Debts to floating loans
(n) Current assets to current liabilities
(o) Net working capital
(p) Total inventory to capital employed. (December 2017)
Propriety Audit - The term ‘propriety‘ has been defined by Kohler as ―that which meets the tests of public
interest, commonly accepted customs and standards of conduct and particularly as applied to professional
performance, requirements of Government regulations, and professional codes. Thus, propriety audit is
verification of transactions in best interest of public, commonly accepted customs and standards of conduct.
Thus propriety audit seeks to ensure that expenditure is not only appropriate to the circumstances, the
objectives for which it was incurred are also achieved. Propriety audit is concerned with executive actions and
plans bearing on the finances & expenditure of the company. The cost auditor has to judge:
a) Whether the planned expenditure is designed to give optimum results.

b) Whether the size and channels of expenditure were designed to produce the best results, and
c) Whether the return from expenditure on capital as well as current operations could be bettered by
some other alternative plan of action.
The auditors, while conducting the propriety audit, should in any case ensure observance of the following
Canons of Financial Propriety:
(a) The expenditure should not, prima facie, be more than the occasion demands. Every public officer is
expected to exercise the same vigilance in respect of expenditure incurred from public money as a person of
ordinary prudence would exercise in respect of expenditure of his own money.
(b) No authority should exercise its power of sanctioning expenditure to pass an order which will be directly
or indirectly to his own advantage.
(c) Public money should not be utilised for the benefit of a particular person or section of the community
unless:
(i) The amount of expenditure involved is insignificant or
(ii) A claim from the amount could be enforced in a court of law or
(iii) The expenditure is in pursuance of a recognized policy or custom.
(d) The amount of allowances (e.g. travelling allowances) granted to meet the expenditure of a particular type,
should be so regulated that these are not on the whole sources of profit to the recipients.
Role of Comptroller & Auditor General (CAG) of India in the Propriety Audit of a Government
company
According to section 139(5) of the Companies Act 2013, in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the Central Government, or by any State Government
or Governments, the CAG shall, appoint an auditor, within a period of one hundred and eighty days from the
commencement of the financial year.
Corporate Social Responsibility (CSR) Audit- Process
A CSR audit program can cover all or any of the following risks: -

• Effectiveness of the operating framework for CSR implementation
• Effectiveness of implementation of specific, large CSR projects
• Adequacy of internal control and review mechanisms
• Reliability of measures of performance
• Management of risks associated with external factors like regulatory compliance, management of potential
adverse NGO attention, etc.
A CSR Audit should cover the following points:
• Human Rights: Fundamental Human Rights, Freedom of association and Collective bargaining, Non-
discrimination, Forced labor, Child labor
• Business behavior: Relations with clients, suppliers and sub-contractors, Prevention of corruption and
anticompetitive practices
• Human Resources: Labor relations, Working conditions including steps taken for preventing accidents and
health hazards, health and safety measures including compensation in case of any accidents, career
development and training, Remuneration system that motivates the employees.
• Corporate Governance: Board of Directors, Audit and internal controls, Treatment of shareholders,
Executive remuneration
• Environment: Incorporation of environmental considerations into the manufacturing and distribution of

products, and into their use and disposal, effect on pollution, pollution control measures undertaken,
• Community Involvement: Impacts on local communities, contribution to social and economic development,
General interest causes, creation of socials infrastructure like roads, schools, hospitals.

Internal Control, Internal Audit and Operational Audit1
Internal controls are certain checks and procedures, installed by the management, to prevent financial fraud
or misappropriation of assets. In other words, internal control system can be defined to be the policies,
practices, procedures, and tools designed with the objective to:
(1) safeguard corporate assets,
(2) ensure accuracy and reliability of data captured and information products,
(3) promote efficiency,
(4) measure compliance with corporate policies,
(5) measure compliance with regulations, and
(6) manage the negative events and effects from fraud, crime, and deleterious activities
Scope of Internal Control (December 2015)
Internal control is an essential pre-requisite for efficient and effective management of any organisation and is,
therefore, a fundamental ingredient for the successful operation of the business in modern days. In fact, an
effective internal control system is a critical success factor for any organization in the long term. Scope of
internal auditors / area of operations of internal audit are as under:-
1. Reliability and integrity of financial and operating information: Internal auditors should review
the reliability and integrity of financial and operating information and the means used to identify,
measures, classify and report such information.
2. Compliance with laws, policies, plans, procedures and regulations: Internal auditor should review
the systems established to ensure compliance with those policies, plan and procedures, law and
regulations which could have a significant impact on operations and reports and should determine
whether the organisation is in compliance thereof.
3. Safeguarding of Assets: Internal auditors should verify the existence of assets and should review the
means of safeguarding assets.
4. Economic and efficient use of resources: Internal auditor should ensure the economic and efficient
use of resources available
5. Accomplishing of established objectives and goals for operations: Internal auditor should review
operation or programmes to ascertain whether results are consistent with established objectives and
goals and whether the operations or programmes are being carried out as planned.
Types of internal control are:
(i) Administrative control – Administrative controls include all types of managerial controls related to the
decision-making process. An example of administrative controls is the maintenance of records giving details
of customers contacted by the salesmen.
(ii) Operational control – This is exercised through “management accounting” techniques viz. budgetary
control, standard costing etc.
1
Includes “Internal audit in different sectors”

Ph.:, 9818010663; Email – nikhil10b@rediffmail.com
(iii) Financial and Accounting control – This control refers primarily the management plans, objectives and
procedures that are concerned with the safeguarding of assets, prevention and detection of fraud and error,
accuracy and completeness of accounting records, and timely preparation of reliable financial information.
(iv) Compliance control – These controls aim at ensuring compliance with applicable laws and regulations.
These controls also help to ensure compliance with laws regarding the system and intellectual property.
(June 2014)
To ensure successful internal control system following factors must be considered: (June 2017)
 Segregation and Rotation of duties

It is very necessary for successful internal control system that no one person handles the complete
transaction i.e., those who physically handle assets are not those who record the asset movements
also. The systems are so designed that no single individual is responsible for all the stages involved in
a transaction i.e., duties are allocated in such a way that no single individual has an exclusive control
over any one transaction or a group of transactions.
 Competence and integrity of people

Internal control systems are not an end to themselves unless these systems are manned by the
competent people, who are honest enough to consistently do so. The controls to be successful and
effective necessitate the need for competent people to enforce such controls.
 Appropriate levels of authority

A common error usually made is to grant too much authority within control boundaries. Sometimes,
this is deliberately done to expedite the things or to handle the emergencies. However, controls to be
effective require the authority to be granted on a need-to have basis only. If there is no need for a
particular person to have a specific authority, he/she should not be granted such authority.
 Accountability
The internal controls to be successful presuppose that there is full accountability for all the decisions
taken and there are controls present, which allow the determination with acceptable level of
confidence of a person taking particular decision or authorizing particular transaction or took specific
action.
 Adequate resources
Controls that are enforced with inadequate resources (manpower, finance, equipment, materials, and
methodologies) will generally fail whenever they come under stress. Therefore, it is very necessary
that minimum resources necessary to enforce the controls must always be present to enable the
controls to be successful and effective.
 Supervision and periodical updation

It is very necessary for the controls to be adequately supervised and periodically updated in line with
changing environment to be effective and successful. For example, in case of banks, if new service
i.e., internet banking is also being started, it is very necessary that internal control system is also
updated accordingly.
Features of a good internal control system (December 2015)
1 Proper organization structure: A good internal control system should involve segregation of duties in
such a manner that error or fraud cannot take place. Proper division of duties, with respect to access to
assets, authorization of transaction, execution of transactions and record keeping should be based on the
organization structure.

2 Scheme of authorization and procedures: A good internal control system should define proper
authorizations and procedures.
3 Internal Check: Accounting procedures should be designed in such a manner that no single person is
authorized to carry out all the operations involved in a transaction. The system should institute a prompt
and independent verification of an individual's work by prescribing cross-checks and cross-reconciliations
as a part of the operating procedure itself and also provide for complimentary allocation of duties.
(June 2018)
4 Suitable personnel: Competent and honest persons alone should be employed in the organization so that
the system operates effectively. The qualification, experience and personal characteristics of the personnel
involved are important in establishing and maintaining a system of internal control.
5 Internal Audit System: The Management may establish an internal Audit Department and delegate some
of its supervisory functions like review of internal control. Internal Audit constitutes a separate component
of internal control system undertaken by specially assigned staff with the objective of determining
whether internal controls are well designed and operating properly.
INTERNAL AUDIT AND ITS SCOPE
Internal auditing is an independent appraisal activity within an organization for the review of operations as a
service to management. It improves managerial control by measuring and evaluating the effectiveness of other
controls, and by maintaining a vigilant watch over risks.
Persons eligible to be an internal auditor
As per section 138 of the Companies Act, 2013 (readwith , the prescribed companies shall be required to
appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other
professional as may be decided by the Board to conduct internal audit of the functions and activities of the
company. (June 2017)
Companies which are mandatorily required to appoint internal auditors
As per Rule 13 of the Companies(accounts) rules, 2014, following class of companies shall be required to
appoint an internal auditor or a firm of internal auditors, namely:-
(a) every listed company;
(b) every unlisted public company having-
(i) paid up share wealth of fifty crore rupees or more during the preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year; and
(c) every private company having-
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year (June 2017)

Need of Internal Audit in India
(i) Clause 49 of Listing Agreement - Responsibility of audit committee to review adequacy of

internal audit function and internal audit reports.
(ii) Section 143(3) of the Companies Act, 2013 – Statutory auditor to state in his audit report
whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls. Prior to this section, Companies (Audit Report) Order, 2015
[‘CARO’] required the statutory auditor to comment whether the internal control system is
commensurate with the size and nature of the business.
(iii) The Securities and Exchange Board of India has mandated complete internal audit on a half-
yearly basis for stock brokers/trading members/clearing members.
(iv) IRDA (Investment) (Fourth Amendment) Regulations, 2008 has introduced requirements of
quarterly internal audit for insurers.
(v) Companies going in for tapping the international capital market, especially, those seeking listing
in US stock exchanges, NASDAQ, NYSE, etc., also need a strong internal audit function to meet
the stringent corporate governance and internal control requirements of those stock exchanges. In
this context, the US companies, having US public as investor also needs to comply with the
requirements of Sections 302 and 404 of the Sarbanes Oxley Act of 2002.
Qualities of good Internal Auditor
According to the ‘Technical Guide on Internal Auditing’ by The Institute of Cost Accountants of India,
Internal Auditor should have following three traits:
• Technical Expertise
• Right Attitude
• Communication and other soft skills.
Statutory Audit
Audit conducted by external auditor appointed by the shareholders of the Company is known as statutory
audit. It is mandatorily to be performed once every year by every company in India. Companies Act, 2013
governs the provisions of appointment, scope and qualification of statutory auditors.
Difference between statutory audit and internal audit
Basis Internal Audit Statutory Audit

Objective and Scope of internal auditor is beyond the The external auditor, on the other hand has a
Scope accounting and financial records to obtain statutory responsibility to report on the true
the full understanding of the operations of and fair view of the accounts of the company
the organization. Objectives and scope of the and whether proper books of accounts and
internal audit are determined by other accounting record have been kept.
management.
Appointment Internal auditor is appointed by the The external auditor is appointed by the
management shareholders of the company in the annual
general meeting in accordance with the
provisions of the relevant Companies Act
Accountability Internal auditors are accountable to the Statutory auditor are accountable to the
management shareholders of the company
Qualification The qualifications of the statutory auditors However, there are no minimum
are prescribed under the provisions of the qualifications prescribed under the

Companies Act. companies act for the persons appointed to

act as internal auditors.
Right to The Companies Act allows the statutory There are no such rights available to the
access books auditor, the right of access at all times the internal auditor.
and other books and accounts and vouchers of the
information company, whether kept at the head office of
the company or elsewhere.
Role of CMAs in internal audit
- to assist the Board in identification, monitoring and management of business risks

- to evaluate organization-culture, ethics, performance and the efficiency and effectiveness of
operations
- check compliance with laws and regulations and authenticate the reliability of financial and
management reporting
- safeguarding the assets of the company
- to evaluate performance management and control systems and act as an advisor to the
Management
- waste reduction and enhancing productivity and process improvement
- to develop an Internal audit strategy that is linked with the organization’s strategic plan with a
focus on optimizing risks, costs, and value
- leverage technology to optimize audit operations and assist management in developing and
maintaining a comprehensive performance management framework
- support and facilitate business process improvement and re-engineering and provide active support
in furthering good Corporate Governance
- to evaluate the operational efficiency, productivity and profitability, wastages, losses, inefficiency
Working Papers
Types of working paper files In case of recurring audits, some working papers files may be classified into
permanent audit files and current audit files: while the former is updated with the Information of continuing
importance, the latter contains information relating to audit of a single period. The contents of these files are
given below:
Permanent Audit File Current Audit File
(a) Legal and organizational structure of the entity, (a) Correspondence relating to acceptance of
e.g. MOA and AOA in case of a company. annual reappointment.
(b) Extracts or copies of legal documents, agreements (b) Extracts of important matters in the minutes of
and minutes relevant to the audit Board Meetings and General Meetings relevant to the
audit.
(c) A record if study and evaluation of internal (c) Copies of management letters.
controls.
(d) Analysis of significant ratios & trends. (d) Analysis of transactions and balances
(e) Copies of the audited financial statements of (e) Copies of communication with other auditors,
previous year(s). experts and third parties.
(f) Notes regarding significant accounting policies. (f) Audit programme.
(g) Significant audit observations of the earlier years. (g) Conclusions reached on significant aspects of
audit.

Working papers are the property of the auditor, the portions or extracts of which can be had at his discretion.
These working papers should kept in safe custody and in confidential manner for such time as is sufficient to
meet the requirements of his practice or to satisfy any related legal or professional requirement of record
retention.
Audit Notebook: An audit book is usually a bound book in which a large variety of maters observed during
the course of audit are recorded. The audit note book is a permanent record of the auditor. For each individual
audit, the auditor usually maintains a separate audit note book. Contents of Audit Note Book
a) Name of the business enterprise.
b) Organisation structure.
c) important provisions of Memorandum and Articles of Association.
d) Communication with the previous auditor, if any.
e) Management representations and instructions.
f) List of books of accounts maintained by the enterprise.
g) Accounting methods, internal control systems followed by the enterprise, applicable laws etc.
h) Key management personnel.
i) Errors and fraud discovered.
j) Matters requiring explanations or clarifications.
k) Special points that need attention in the audit report and for subsequent’ audits.

Past examination questions
Illustration 1: As a cost auditor suggest different measures to rectify imbalance in production facilities of an
unbalanced plant. (June 2008 & 2010; December 2005)
Solution: Unbalanced plant refers to a situation where some of the machines or work centres are overworked
while other work centres are underutilized. Unbalanced plants are usually accompanied by high cost due to
inventory imbalance, bottlenecks and underutilization of some machines etc. Due to such qualities of
unbalanced plant they usually reduce the profitability of the company. However profitability can be increased
and the imbalance can be rectified by following measures:
1) Balancing the load by hiring extra machines or renting out additional capacity; the possibility of
purchasing new machines cannot be ruled out.
2) The machinery with low capacity can be worked in second and triple shifts
3) Plants with excess capacity may be sold out
4) Additional orders for the work of excess capacity plants can be accepted
5) Under-utilised plants can be outsourced or leased for excess capacity.
Illustration 2: Write short note on :
a) Social Responsibility management (June 2007, 2012 & 2017, December 2015 & 2017)
b) Enterprise Resource Planning (ERP) (June 2017)
Solution: a) Corporate Social Responsibility (CSR) means that the corporate is not only responsible to its
shareholders but also to the general public at large. For development of the factory and other infrastructure
requirements generally forest area is depleted which leads to massive deforestation and many environmental
hazards. Further the corporate world is also responsible to general public at large for proper disposal of waste
generated by the industries. The company owes a duty towards the public for ensuring that the normal life of
the community is not affected by the manufacturing process.
As per the Section 135(1) of the Companies Act, 2013, every company having net worth of rupees five
hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or
more during any financial year shall constitute a Corporate Social Responsibility (CSR) Committee of the
Board consisting of three or more directors, out of which, at least, one director shall be an independent
director.
In terms of the Section 135(5) of the Act read with Companies (Corporate Social Responsibility Policy) Rules,
2014, the company, in pursuance of the recommendations of the CSR Committee of the Board and as per the
declared CSR Policy of the company, spends, in every financial year, at least, two per cent. of the average net
profits of the company made during the three immediately preceding financial years subject to the condition
that such policy will cover the subjects enumerated in the Schedule VII of the Act.
In Schedule VII, the following items and entries are illustrative:
(i) eradicating hunger, poverty and malnutrition, safe drinking water,

(ii) promoting education, vocation skills among children, women, elderly persons
(iii) promoting gender equality, empowering women, setting up homes, hostels for women and
orphans, old age homes, day care centers, etc.
(iv) environmental and ecological balance, protection of flora and fauna
(v) protection of national heritage, art and culture, etc.
(vi) measures for the benefit of armed forces veterans, war windows, etc.

Though there is no mandatory requirement for CSR Audit, yet a CSR Audit programme will form part of the
Management Audit and may cover all or any of the following aspects / areas:
 Human Rights: Fundamental human rights, Freedom of association and Collective Bargaining, Non-
discrimination, Forced Labour, Child Labour.
 Business behaviour: Relations with clients suppliers and sub-contractors, prevention of corruption
and anticompetitive practices.
 Human Resources: Labour relations, Working Conditions including steps taken for preventing
accidents and health hazards, health and safety measures including compensation in case of any
accidents, career development and training, remuneration system that motivates the employees
 Corporate Governance: Board of Directors, Audit and Internal controls, treatment of shareholders,
executive remuneration
 Environment: Incorporation of environmental conditions into the manufacturing and distribution of
products and into their use and disposal, effect on pollution, pollution control measures undertaken
 Community Involvement: Impacts on local communities, contribution to social and economic
development, general interest causes, creation of social infrastructure like roads, schools, hospitals etc.
b) Enterprise Resource Planning (ERP) is the activities supported by multi-module application software,
which helps the business in the management. It is a business management system that integrates all area of the
business, including planning, purchasing, manufacturing, sales and marketing etc., which may be located at
different locations. It serves the information needs of an organisation of each department to know what is
happening in each of the departments. They seek to combine the separate records relating to the same subject
at one place making them completely reliable and comprehensive. ERP is the software solution to address the
enterprise needs taking the process view of an organisation by tightly integrating all functions like inventory
control, order taking, customer service etc into unified system. It facilitates the enterprise wide integrated
information system covering all functional areas. A key ingredient of most ERP systems is the use of a unified
database to store data for the various system modules. The common database allows every department to store
and retrieve information in real time. It allows information to be more reliable, accessible and easily shared.
The major Characteristics of ERP systems necessitating change in audit approach are:
1. On-line real time processing.
2. All transactions are stored in one common database.
3. System usually resides on multiple computers.
4. Optimum co-ordination is a challenge.
5. Traditional ―batch controls and audit trails not available.
6. Data bases can be accessed by any module.
7. System modules are transparent to the user.
8. Significant increase in number of users.
9. Network and database access security is required is most important

Illustration 3: What is the role of Audit Committee, where applicable, in dealing with the Cost Audit Report.
Can the Annexure to a Cost Audit Report be approved by the Audit Committee and/or the Board of Directors
by circular resolution. (Final December 2013)
Solution: The Audit Committee should have discussions with the auditors periodically about internal control
systems, the scope of audit including the observations of the auditors and review the half yearly and annual
financial statements before submission to the Board and also ensure compliance on internal control systems.
The term “auditors” includes cost auditor and hence “scope of audit including observations of the auditors”
occurring above includes the scope of cost audit including observations of the cost auditors as well.
The presence of the cost auditor in such committees will ensure overall cost management, efficiency in
resource utilization, business vertical-wise performance evaluation, proper pricing of inter-unit/inter-company
transfers and valuation of inventories.
Hence, the company must place the cost audit report before the Audit Committee first, which in its duty to
ensure compliance of internal control system shall also discuss the suggestions made in the cost audit report
for implementation, wherever cost audit has been directed under section 233B of the Companies Act, 1956.
The Audit Committee, after due consideration of the Cost Audit Report is required to submit the same for
approval of the Board of Directors. Since the Board of Directors is required to approve the Annexure to the
Cost Audit Report and authorize one of the Directors and the Company Secretary (two Directors in the
absence of a Company Secretary) to sign the same, the Board should also consider the Cost Audit Report in a
duly convened meeting and it would not be advisable to approve the same by circular resolution.
Illustration 4: How the adequacy of Internal Audit function can be assessed? (December 2013)
Solution: Many a times it is required to assess the adequacy of internal audit function of an organization to
assess the reliability of Internal audit. The following questionnaire may be required to evaluate the work of the
internal auditor and assess the adequacy of the internal audit function:
1. What is the organizational set up of the department?

2. Is the staff employed in the department adequate?
3. Are the qualifications of the staff adequate
4. Is the staff competent?
5. Is the staff independent?
6. To whom do they report frequently and with what effect?
7. Is there any internal audit manual?
8. Is a programmed of internal audit drawn up before the commencement of the financial year?
9. Does the programmed cover the audit of all the important transactions and records of the company
including statutory cost accounting records?
10. Is the scope of internal audit wide enough to extend to areas such as, management audit, operational
audit and system analysis?
11. What is the system of reporting irregularities noticed during internal audit?
12. Is prompt corrective action taken by the management on the basis of internal audit reports?
13. Is there much duplication of work between the statutory audit and internal audit?
Illustration 5: What is the Role of Management with regard to Internal Control? (June 2015)
Solution: The responsibility of Management with regard to internal Control can be summarized as under-

1. Creation of system: Management is responsible for maintaining an adequate accounting system

incorporating various internal Controls to the extent appropriate to the size and nature of the Business.
The Management is vested with the responsibility of carrying on the business, safeguarding its assets
and recording the transactions in the books of account and other records.
2. Review of system: The system installed, should be reviewed by the Management to ascertain,
whether-
(a) The prescribed Management policies are being properly interpreted by the employees and are
faithfully implemented,
(b) The prescribed procedures need a revision due to changed circumstances or whether they have
become obsolete or cumbersome, and
(c) Effective corrective measures are taken promptly when the system appears to breakdown
3. Internal Audit: it is desirable that the Management also installs an internal audit System as an
independent function to check, amongst other things, the actual operation of the Internal Control
System and report any deviations or non-compliances.
Illustration 6: Enumerate the points which are to be considered for conducting an audit of the following
organisations:
HOSPITALS
- charter or trust deed under which the hospital has been set up and take a special note of the
provisions affecting the accounts.
- entries in the Patient’s Bill Register with a copies of bill issued.
- collection from patients with copies of bills and entries in Bills Register.
- interest and/ or dividend income should be vouched with reference to the investment Register and
interest and dividend warrants.
- In case of legacies and donations which are received for specific purposes, it should be ensured
that any income therefrom is not utilized for any other purposes.
- Where receipts of subscription show a significant deviations from budgeted figures, it should be
thoroughly inquired into and the matter be brought to the notice of the trustees or the managing
committee.
- Government grants or grants from local bodies should be verified with the reference to the
correspondence with the concerned authorities.
- Verify the system of internal check as regards purchases and issue of stores, medicines etc.
- examine that the appointment of the staff, payment of salaries etc. are duly authorized.
(June 2018)
HOTELS
- Pilferage is one of the greatest problems in any hotel and it is extremely important to have a proper
internal control to minimize the leakage.
- effectiveness of arrangement regarding receipts and disbursements of cash.
- Procedure for purchase and stocking of various commodities and provisions.
- Procedure regarding billing of the customers in respect of room service, telephone, laundry, etc.
- system regarding recording and physical custody of edibles, wines, cigarettes, crockery and
cutlery, linen, furniture, carpets, etc.

- ensure that are trading accounts are prepared preferably weekly, for each sales point. a scrutiny of
the percentage of profit should be made, and any deviation from the norms is to be investigated.
- room Sales and cash collections:
- sales reported with the total bills issued at each sales point have to be reconciled.
- all movement and transfer of stocks must be properly documented.
- areas where stocks are kept must be kept locked and the key retained by the departmental
manager.
- the auditor should ensure that all stocks are valued at the year end and that he should himself be
present at the yearend physical verification
- fixed assets should be properly depreciated, and the Fixed Assets Register should be updated.
- compliance with all statutory provisions, and compliance with the Foreign Exchange Regulations
must also be verified by the auditor, especially because hotels offer facility of conversion of
foreign exchange to rupees.
EDUCATIONAL INSTITUTIONS
- examine the trust deed, or Regulations in the case of school or college and note all the provisions
affecting accounts.
- Check names entered in the Students’ Fee Register for each month or term, with the respective
class registers, showing names of students on rolls and test check amount of fees charged; and
verify that there operates a system of internal check which ensures that demands against the
students are properly raised.
- check fees received by comparing counterfoils of receipts granted with entries in the cash book
and tracing the collections in the Fee Register to confirm that the revenue from this source has
been duly accounted for.
- Check admission fees with admission slips signed by the head of the institution and confirm that
the amount had been credited to a Capital Fund, unless the Managing Committee has taken a
decision to the contrary
- Confirm that fines for late payment or absence, etc., have either been collected or remitted under
proper authority.
- Confirm that hostel dues were recovered before students’ accounts were closed and their deposits
of caution money refunded.
- Verify any government or local authority grant with the relevant papers of grant. if any expense
has been disallowed for purposes of grant, ascertain the reasons and compliance thereof
- Vouch donations, if any, with the list published with the annual report. if some donations were
meant for any specific purpose, see that the money was utilised for the purpose.
- Verify the inventories of furniture, stationery, clothing, provision and all equipment, etc. these
should be checked by reference to stock Register and values applied to various items should be test
checked.
CO-OPERATIVE SOCIETIES
Section 17 (2) of the Co-operative Societies Act, 1912 specifically requires the auditor to conduct an
examination of the overdue debts, if any, and a valuation of the assets and liabilities of the society.the auditor

of a co-operative society is also required to point out various irregularities, improprieties, and departures from
the provisions of the act, rules framed thereunder, and the bye-laws of the society.
Special features of co-operative societies audit, to be borne in mind while conducting the audit are as follows:
- examination of overdue debts: Overdue debts for a period from six months to five years and more
than five years will have to be classified and shall have to be reported by an auditor.
- overdue Interest: overdue interest should be excluded from interest outstanding and accrued due
while calculating profit.
- Certification of Bad Debts:. Bad debts and irrecoverable losses before being written off against
Bad debts Funds, Reserve Fund etc. should be certified as bad debts or irrecoverable losses by the
auditor where the law so requires.
- valuation of assets and liabilities: The auditor will have to ascertain existence, ownership and
valuation of assets. Fixed assets should be valued at cost less adequate provision for depreciation.
- adherence to co-operative Principles: the auditor will have to ascertain in general, how far the
objects, for which the co-operative organisation is set up, have been achieved in the course of its
working.
- observations of the Provisions of the act and rules: an auditor of a co-operative society is required
to point out the infringement with the provisions of Co-operative Societies Act and Rules and bye-
laws.
- Verification of Members’ Register and examination of their pass books: examination of entries in
members, pass books regarding the loan given and its repayments, and confirmation of loan
balances in person is very important in a co-operative organisation to assure that the entries in the
books of accounts are free from manipulation.
- Special report to the registrar: during the course of audit, if the auditor notices that there are some
serious irregularities in the working of the society, he may report these special matters to the
Registrar, drawing his specific attention such irregularities.
- Audit classification of society: after a judgment of an overall performance of the society, the
auditor has to award a class to the society. This judgment is to be based on the criteria specified by
the Registrar.
SELF-HELP GROUPS
Self Help Group (SHG) movement in India has been recognized as an effective strategy for mobilization and
empowerment of rural people, particularly poor women and other marginalized groups.in india, self Help
groups or SHGs represent a unique approach to financial intermediation. The approach combines access to
low-cost financial services involving a process of self-management, with an objective of social and economic
development for the women SHG members. Formations of SHGs are facilitated by the Government or by
NGOs. Following is to be reviewed while auditing a SHG:-
- Background review: during a background review, a preliminary examination of the group level
records, including the cash book, is conducted. the auditor also does a general review of the group
level records and member passbooks to verify/ cross-check data entries for their accuracy and
correct posting.

- Prepare field Balance Sheet: The auditor prepares the Field Balance Sheet for the group, as on the
date of the audit, based on the SHG’s internal records and then cross checks the correctness of
balance sheet items.
- Private Meetings with Members: the auditor conducts private interviews with 25% of total
members to triangulate information collected from the background review, as well as from the
Field Balance Sheet and to ascertain the decision-making pattern in the group.
- Meeting with the SHG Group (30minutes): if serious issues were raised during the course of the
audit, the auditor will meet with the entire group for further discussion.
- reporting: once the auditing is complete, the auditor summarises any weak practices that put
savings at risk or make records unreliable, and recommends any better methods.
Non-Governmental Organisations (NGOs)
- corpus fund :the contributions/grants received towards corpus be vouched with reference to the
letters from the donor(s). the interest income be checked with investment Register and physical
investments in hand.
- reserves : Vouch transfers from projects/programmes with donors letters and board resolutions of
NGO. Also check transfers and adjustments made during the year.
- ear-marked funds : check requirements of donors’ institutions, board resolution of NGO, rules and
regulations of the schemes of the ear-marked funds.
- Project/agency Balances: Vouch disbursements and expenditures as per agreements with donors
for each of the balances.
- loans : Vouch loans with loan agreements receipt counter –foil issued.
- fixed assets : Vouch all acquisitions/sale or disposal of assets including depreciation and the
authorisations for the same.
- Investments : check investment Register and the investments physically ensuring that investments
are in the name of the NGO. Verify further investments and dis-investments for approval by the
appropriate authority and reference in the bank accounts for the principal amount and interest.
- cash in Hand : Physically verify the cash in hand and imprest balance, at the close of the year and
whether it tallies with the books of accounts.
- Bank Balance : check the bank reconciliation statements and ascertain details for old outstanding
and unadjusted amounts.
- Stock in Hand : Verify stock in hand and obtain certificate from the management for the quantities
and valuation of the same.
- Programme and Project expenses : Verify agreement with donor/contributor (s) supporting the
particular programme or project to ascertain the conditions with respect to undertaking the
programme/project
- establishment expenses : Verify that provident fund, life insurance and their administrative charges
are deducted, contributed and deposited within the prescribed time.
- contribution and Grants for projects and programmes: check agreements with donors and grants
letters to ensure that funds received have been accounted for. check that all foreign contribution
receipts are deposited in the foreign contribution bank account as notified under the Foreign
Contribution (Regulation) Act, 1976.
- receipts from fund arising programmes: Verify in detail the internal control system and ascertain
who are the persons responsible for collection of funds and mode of receipt. ensure that collections
are counted and deposited in the bank daily.

- Membership fees: Check fees received with membership register, ensure proper classification is
made between entrance and annual fees and life membership fees.
- Subscription : check with subscription register and receipts issued. Reconcile subscription received
with printing and despatch of corresponding magazine/circulars/periodicals. check the receipts
with subscription rate schedule.
LOCAL BODIES
Local bodies are institutions of the local self governance, which look after the administration of an area or
small community such as villages, towns, or cities.
- Budgetary Procedure: The objective of local bodies budgetary procedure are financial
accountability, control of expenditure, and to ensure that funds are raised and moneys are spent by
the executive departments in accordance with the rules and regulations and within the limits of
sanction and authorisation by the legislature or council.
- expenditure control: at the state and central level, there is a clear demarcation between the
legislature and executive. in the local body, legislative powers are vested in the council whereas
executive powers are delegated to the officers, e.g., Commissioners. All matters of regular revenue
and expenditures are generally delegated to the executive wing. For special situations like,
reduction in property taxes, refund of security deposits, etc., sanction from the legislative wing is
necessary.
- accounting System: municipal accounting system has been conventionally prepared under the cash
system. in the recent past however, it is being changed to the accrual system of accounting. To
report the content and presentation of financial statements are true and fair
- Detection and prevention of error fraud, misuse of funds
- To ascertain that full value received for money spent
- Legal and administrative requirements fulfilled
- All sanctions are accorded by competent authority
- Expenditure incurred are according to provisions and as per regulations framed by competent
authority
- Different schemes, programmes, and projects are running economically and the purpose such
programme is achieved.
GOVERNMENT EXPENDITURE AUDIT
Government expenditure audit - audit of government expenditure is one of the major components of
government audit conducted by the office of C & AG.
- audit against Rules & orders: the auditor has to see that the expenditure incurred conforms to the
relevant provisions of the statutory enactment and is in accordance with the financial rules and
regulations framed by the competent authority.
- audit of sanctions: the auditor has to ensure that each item of expenditure is covered by a sanction,
either general or special, accorded by the competent authority, authorising such expenditure.

- Audit against Provision of Funds: It contemplates that there is a provision of funds out of which
expenditure can be incurred and the amount of such expenditure does not exceed the
appropriations made.
- Propriety audit: it is required to be seen that the expenditure is incurred with due regard to broad
and general principles of financial propriety. The auditors aims to bring out cases of improper,
avoidable, or infructuous expenditure even though the expenditure has been incurred in conformity
with the existing rules and regulations.
- Performance audit: this involves that the various programmes, schemes and projects where large
financial expenditure has been incurred are being run economically and are yielding results
expected of them. Efficiency-cum-performance audit, wherever used, is an objective examination
of the financial and operational performance of an organisation, programme, authority or function
and is oriented towards identifying opportunities for greater economy, and effectiveness.
AUDIT OF COMMERCIAL ACCOUNTS
The government also engages in commercial activities and for the purpose it may incorporate following types
of entities:
(i) departmental enterprises engaged in commercial and trading operations, which are governed by the same
regulations as other government departments such as defense factories, mints, etc.
(ii) Statutory corporations created by specific statues such as LIC, Air India, etc.
(iii) government companies, set up under the companies act, 2013. all aforesaid entities are required to
maintain accounts on commercial basis. the audit of departmental entities is done in the same manner as any
government department, where commercial accounts are kept. audit of statutory corporations depends on the
nature of the statute governing the corporation. in respect of government companies, the relevant provisions of
companies act, 2013 are applicable.
Illustration 7: State which one of the following companies is required to appoint Internal Auditor as per the
Companies Act, 2013, and the Rules made thereunder: Figures are in ` crore and correspond to the previous
year.
Name Nature Equity Turnover Loan from Public

Capital Bank/PFI Deposit
LMN Ltd. LISTED 100 190 50 24
PQR Ltd. UNLISTED 60 190 50 24
PUBLIC
XYZ Ltd. UNLISTED 60 190 50 -
PRIVATE
Solution: As per the provisions of Companies Act, 2013 (as discussed above), the requirements of internal
audit for each company is as under:
(1) LMN Ltd. Being listed company has to appoint Internal Auditor in either case.
(2) PQR Ltd. An unlisted company exceeds capital limit of rupees 50 crore though the minimum
turnover, minimum loan and public deposit are not met. The company has to appoint an Internal
Auditor.
(3) XYZ Ltd. An unlisted private company need not appoint Internal Auditor as the limits of appointment
of Internal Auditor are not met.

(December 2017)
Illustration 8: Can the Chief Cost Accounts Officer of the company be given additional charge as Internal
Auditor?
Solution: Rule 13 of the Companies (Accounts) Rules, 2014 states that Internal Auditor may or may not be an
employee of the company. There is no mandate in the law that the post of Internal Auditor needs to be full
time. The Chief Cost Accountant officer being otherwise eligible can be appointed as Internal Auditor in
addition to his present job, if the Audit committee or the Board of Directors consider the same. Additional
duties given to the Chief Cost Accountant Officer to act as Internal Auditor of the company is therefore
permissible under Rules. (December 2017)
Illustration 9: You are the Internal Auditor of Atlas Manufacturing Ltd. The Audit Committee desires to
enquire into the cause of abnormal rise in raw materials costs during the previous month when there was no
significant change in the production programme. How will you proceed?
Solution: The Internal Auditor has a duty to inquire into the cause of financial disorder and report to the
Management. The abnormal rise in raw material costs in the previous month without any significant change in
production programme must raise concern. Hence, it may be considered as abnormal cost and the auditor
should proceed on the following lines:
1. Variable Analysis: A variance analysis of the actual cost with that if the standard or if there is no Standard
Costing System, proceed with that of the previous month. The analysis will highlight (a) Price Variance (b)
Volume Variance (c) Usage.
In case of abnormality in price: (i) Procure a list of raw materials, showing the names and detailed qualities of
each raw material
(ii) Enquire whether there is any change which will affect material usage e.g changes in (a) source of supply
of raw materials (b) methods or process (c) market rates (d) alternative material cost in substitution of the
original.
(iii) Enquire whether any new production line was taken up during the month in respect of which Standard
Input-Output ratio is yet to be set up.
(iv) Purchase of various lots
(v) Identification of each lot with production results.
2. Usage Figures: (i) Obtain the standard consumption figures and ascertain the basis of computation of
normal usage figures
(ii) Examine whether the basis adopted for usage calculation is the same as that adopted for the previous
months
(iii) See the breakup of normal wastage (a) transit (b) storage (c) handling and (d) processing
(iv) obtain a statement showing break up of actual material consumption and

(v) Ascertain actual wastage figures for the month under review and compare the results of the analysis for
some of the previous months.
3. Abnormal process loss: (i) Material Quality: Examine inspection and testing reports to find out if raw
materials purchased are of poor quality or sub-standard. This will be most useful if it is possible to identify the
consumption out of each lot that has been purchased.
(ii) Machine Utilisation: Machine breakdown, power failure etc. may also result in loss of materials in
process. Check machine utilisation statements.
(iii) lnspection: A high rate of rejection in the finished lots may also be responsible for abnormal wastage.
Examine the Inspection Reports for the inspection carried out on the completion of each stage of work or
process.
(iv) Old Lot Consumption: It is possible that the wastage may have occurred because the particular lot out of
which issues were made in was lying in the store for a longtime.
(v) Previous Period Comparison: Compare the wastage figures of this year with that of the correspxonding
period last year and see whether there is any correlation.
4. Abnormal Storage and handling Loss: This can happen due to write-offs on the account of reconciliation
of physical and book stocks. In case of periodical physical stocktaking, such write offs will be reflected only
in the month in which reconciliation takes place. There can be accidental theft or fire losses in storage. The
Auditor should examine such possibilities.
Illustration 10: Write a short note on the role of Internal Auditor of a company to review Custodianship and
Safeguarding of Assets.
Solution: The Internal Auditor should review the control system to ensure that all assets are accounted for
fully. He/ she should review the means used for safe guarding assets against losses viz, fire, improper or
negligent activities, theft, illegal activities etc. He/she should review the control system for intangible assets,
e.g, the procedure relating to credit control. Where a company uses electronic control equipment, the physical
and system control on processing facilities as well as data storage should be examined and tested. He or she
should review adequacy of the insurance cover for the various risks involved. He/she should also verify the
existence of assets. Para 30 of the Companies(Cost Records And Audit) Rules, 2014 states that “records of
physical verification may be maintained in respect of all items held in the stock such as raw materials, process
materials, packing materials, consumable stores, machinery spares, chemicals, fuels, finished and then assets
etc. Reasons for shortages or surplus arising out of such verifications and the method followed for adjusting
the same in the cost of the goods or services shall be indicated in the records.”
Illustration 11: ABC Ltd., a public limited company not listed in Stock Exchange, had turnover of `250 crore
in the year 2016-17. Is the company under obligation to appoint an Internal Auditor? Will the answer differ if
the company
(a) is a private limited company?
(b) is a producer company? (December 2017)
Solution: Sec 138 of the Companies Act, 2013 prescribes that, the Central Government may by notification
prescribe rules for appointment of Internal auditors. The Companies (Accounts) Rules, 2015 states that every

unlisted company having turnover of ` 200 crore or more per annum should appoint an internal auditor. The
answer will not differ if the company is a private company since as per the above Rules, a private company
having a turnover of ` 200 Crore or more need to appoint an internal auditor.
Sec 581ZF of the Companies Act, 2013, requires that every producer Company shall have internal audit of its
accounts carried out by a Chartered Accountant at such interval and in such manner as may be specified in the
articles.
Illustration 12: In case of In-house Internal Audit, how to ensure quality in Internal Audit? (December 2017)
Solution: A proper organisation structure for internal auditing department ensures its relative independence so
that it can carry out its work freely and objectively and render impartial and unbiased decision when internal
auditing function is carried out in-house. The purpose of the review for quality of performance is to ascertain
whether the organization's objectives and goals have been achieved. The primary objectives of internal audit
are to ensure –
(i) reliability and integrity of information
(ii) compliance with policies, plans, procedures, laws and regulations,
(iii) the safeguarding of assets,
(iv) the economical and efficient use of resources,
(v) the accomplishment of established objectives and goals of operation or programmes.
Operational audit (December 2008 & June 2012)
It concentrates on seeking out aspects of operations in which waste, inefficiency and excessive costs would be
subject to reduction by the introduction of improvement of operating controls. It is audit of the performance at
mainly operating level i.e. supervisory level.
Operational audit objectives include: (December 2015, December 2016)
(i) Appraisal of controls : The most significant gain an organization can derive from operational auditing is
probably in the area of appraisal of controls. Internal controls, because of their unobtrusive omnipresence in
the organization, provide the essential hinges to ensure proper performance in each functional or
organizational area for accomplishing the desired organizational objective.
(ii) Evaluation of performance : In performance appraisal, the operational auditor is basically concerned not
so much with how well technically the operations are going on, but with accumulating information and
evidence to measure the effectiveness, efficiency and economy with which the operations are being carried on.
The principal basis of performance evaluation can be productivity, personnel, workload, cost and quality. In
the area of productivity, the operational auditor can undertake such tests as input-output ratios for materials
and labour in quantitative terms.
(iii) Appraisal of objectives and plans : Everything in an organization is the product of basic plans and
objectives set by the management. If the management policy favours installation of controls or specifies the
extent of controls whether satisfactory or not, control would have to stay within the policy frame. Therefore,
the basic thing that should be evaluated is management policies, plans and objectives. Operational auditor may

look into the aspects like whether objectives are clearly spelt out and properly communicated to the personnel
responsible for implementation and whether the personnel have understood the objectives in the sense meant
by the management. Also, he can take note of any apparent conflict in the objectives for its effect on
operations.
(iv) Appraisal of organizational structure : Organizational structure provides the line of relationship and
delegation of authority and tasks. This is an important element of the internal control design. Therefore, this is
also another important area for appraisal by the operational auditor. In evaluating organizational structure, the
aspects that may be considered by the operational auditor whether the organizational structure are in
conformity with management objectives and is drawn up on the basis of matching of responsibility and
authority.
Difference between internal audit and operational audit (December 2017)
Basis Internal Audit Operational Audit

Objective Compliance Risk identification and process improvement
Focus Financial accounts, policies and Business as a whole; risk management
procedures
Aim Financial Audit Efficiency and improvement
Based on Financial transactions Business Processes
Monitoring Cost centre-wise budget monitoring Performance and results monitoring
Thrust Policies, transactions and compliance Goals, strategies and risk management
processes
Illustration 13: A company is facing problem in satisfying customers’ orders leading to backlog of supply
position. How to identify the problem by means of Operational Audit? (December 2017)
Solution: The Operational Auditor may use the technique of Work Load Measurement to assess the situation.
He/She may draw up a questionnaire to assess the situation so as to include the following queries:
• Is there a backlog of work and if so whether the same is due to increased volume or inadequacy of men,
material or machines?
• Is the increase in work volume is temporary or may continue?
• Will the situation likely to ease with additional inputs like personnel, machines etc?
• Is the workload of each employee is justified or needs adjustment through improved supervision or
training?
• Will investment in advanced technology will commensurate with benefits derived from it?
• What control measures exist to assess the work efficiency and what are the remedial measures? The
operational auditor will proceed to finalise the report and submit to the Management after collecting
and analysing the information received.
Budgetary control system
Budget is a financial and/or quantitative statement prepared and approved prior to a period of time, to the
policy to be pursued during that period for the purpose of attaining a given objective.
Budgetary control is the establishment of budget relating to the responsibilities of executives to the
requirements of organisation, and the continuous comparison of actual with budgeted results. The advantages
of budgetary control are –
(1) combines the ideas of different levels of management in the preparation of the budget;
(2) coordinates all the activities of business in order to centralize control but decentralize responsibility onto
each manager involved;

(3) plans and controls income and expenditure so as to achieve the highest profitability acts as a guide for
management decisions;
(4) ensures sufficient working capital and other resources for the efficient operation of the business;
(5) directs capital expenditure in the most profitable direction;
(6) reduces wastes and losses to minimum and thus ensures in increase in productivity as regards men,
machines and materials;
(7) provides a yardstick against which actual results can be compared; and
(8) shows management where effort is needed to remedy the situation without any delay.
Adequacy of Budgetary Control System. (June 2018)
In the area of planning:
1. Where it covers all interrelated functions like production, sales, purchasing and finance.
2. Whether it determines the linkage between budget centres and responsibility centres.
3. Whether it establishes definite goals and limits for these function well in advance. The system must answer
the questions such as “what they are expected to operate?” What will be the financial requirement for the
functional areas? What would be the potential problems in the key areas?
4. Whether there are imbalances in the fixation of performance levels of functional budgets in relation to sales
budgets.
5. Whether budget monitoring cell exists for operating the system in right perspective.
In the area of Coordination:
1. Whether the Budget monitoring committee holds the meetings regularly with a view to ensure performance
evaluation.
2. Whether it helps to prevent waste that results in duplicate or gross purpose activities.
3. Whether it reveals time lines in the process of preparation and approval of all functional Budgets and
Master Budgets.
In the area of Control:
1. Whether system exists for measuring, comparing and qualifying the results of all functional areas;
2. Whether the Budget incorporates a degree of flexibility with a provision of its periodical review;
3. Whether the various reports are issued in time and appropriate corrective action is taken on their variances.
(June 2012)
Inventory Control System
Inventory includes stock of raw materials, work-in-progress and finished goods, stores and spares etc. Control
of inventory is important to control the cost of carrying inventory for any organization. We need to ascertain

what levels of inventory to be maintained within an organisation at any given point of time. The following
aspects may be taken into consideration for proper inventory control –
1. Maximum, minimum and reorder level fixation
2. Fixed order quantity system and different replenishment systems.
3. ABC method
4. Pareto distribution
5. VED analysis
6. Just-in time (JIT) purchasing
7. Fast moving, slow moving and non-moving analysis.
Internal control questionnaire relating to inventory:

1. Is the storage accommodation adequate to provide protection against
- deterioration?
- access by unauthorized persons?
- any other local hazards?
2. Are issues from the stores made only against properly authorized requisition(s)?
3. Who are authorized to sign requisition? Specify name, position, etc.
4. Are bin cards or similar records maintained at the stores location?
5. Are continuous stock records maintained for
- raw materials?
- bought out components?
- consumable stores?
- finished goods?
- stocks held on behalf of third parties?
6. Are these records maintained
- in quantity only?
- in value only?
- in both quantity and value?
7. Are stores records maintained by a person independent of
- the store keepers?
- those responsible for physically counting or checking stocks?
8. Are independently maintained control accounts kept for each category of stock mentioned in 5?
9. Is the counting system fully integrated with the financial records?
10. If not are totals of various categories of costs (including overheads) regularly reconciled with the actual
costs in the financial records?
11. Are work orders issued
- against specific orders?
- on the basis of pre-determined production targets?
- on some other basis?
12. How are work orders authorized? Specify.
13. On what basis are materials, labour and other direct costs charged to the work-in-progress accounts?
Specify.
14. Are Overheads clearly divided into fixed and variable overheads?
15. What is the basis of allocation of overheads to costs and recovery of overheads ? Specify.
16. Does the system ensure that excess or abortive costs are written off and not carried forward in the work in
progress?

Management Information System (MIS)
With an increase in quantum of operations of business, it is essential to provide managers at all levels in all
functions with the information to help them make timely and effective decisions. MIS is a tool which acts as a
reservoir of vital information which assist managers at all level to make effective decisions because a decision
can only be taken only when the adequate information is available with the managers. Use of computer
systems, LAN (Local Area Network) /WAN (Wide Area Network) connectivity and Internet etc. is common
for MIS applications.
Management Information System and Cost Auditor
The cost auditor has to consider various aspects while evaluating the effectiveness of a Management
Information System. At first he should consider the following aspects while appraising the MIS –
(i) the content, quality and source of information.
(ii) flow of information from the originator to the receiver, and
(iii) correlation of information in the decisional areas.

Cost Audit Documentation and Audit Process

Engagement Letter
Auditors agree with the client’s management, in writing, about the scope, terms and conditions of the audit
engagement, in an engagement letter. The purpose of such a letter is to minimize any possible
misunderstanding concerning the scope and terms of the audit engagement.
Terms of audit engagement
(i) The objective and the scope of the engagement.

(ii) Management’s responsibility for the financial statements.
(iii) The existence of inherent limitations of audit and resulting material misstatements that may
remain undiscovered,
(iv) The need for use of services of internal auditors and/ or other experts that may arise during the
course of the engagement.
(v) The requirement of management confirmation letter as regards representations made by them
concerning audit.
(vi) Restriction of the auditor’s liability, if any.
(vii) Basis for computation of audit fees and billing arrangements.
(viii) The form of reports or other communication of results of the engagement.
Audit documentation: Audit documentation means the material such as
- Documents supporting the audit assertions of the management

- Evidence of checking of the various heads of the financial statements
- working papers etc.
prepared by and for, or obtained and retained by the cost auditor in connection with the performance of
the audit.
Audit file: Folders or other storage media, in physical or electronic form, containing the records that comprise
the audit documentation for a specific assignment or audit.
Audit working papers: Documents which record all audit evidence obtained during audit. Such documents
are used to support the audit work done in order to provide assurance that the audit was performed in
accordance with the relevant Cost Audit and Assurance Standards.
Audit stages
The stages of an audit of cost statements are
1) Planning
2) Performing and
3) Reporting
Stage I: Planning involves:
- Gaining an understanding of the client,

- Identifying the objectives of audit (statutory requirements as well as management expectations)
- identifying factors / account heads that may have the risk of a material misstatement

- performing a risk and materiality assessment, and developing an audit strategy

- identifying the nature, timing and extent of the procedures to be performed
Stage II: Performing involves:
- Detailed testing of internal controls and decide upon the extent of reliance which can be placed on
internal controls
- Substantive testing of cost accounting policies & procedures
Stage III: Concluding and Reporting involves:
- evaluating the results of detailed testing and

- forming an opinion on the fair presentation of the entity’s cost statements as a whole
Process of audit: After laying out the broad stages of audit, it is important to understand the exact steps to be
undertaken by a cost auditor when he undertakes any cost audit:
Stage-I Steps – Objectives of Audit and Management Outlook
At the outset, it is important to understand the statutory requirements and / or management expectations from
the cost audit, such as:
- cost optimization or cost reduction

- checking parameters of operational efficiency of a unit or any utility or any other function or
department
- suggesting product diversification or changed product-mix
- identifying profit making or loss making products
- suggesting changed marketing strategies; market expansion; market diversification
- complete review of business strategies
Stage-II Steps – Pre-conditions of audit
The cost auditor should fully understand the
- Objectives of cost audit

- Area, nature and scope of audit
- Number of cost auditors appointed
- The applicable reporting framework
- The reporting period
- The statutory deadlines
The Management should understand its scope of work and responsibilities:
- maintenance of cost records & producing them to the cost auditor;

- preparation & presentation of cost statements & other details as per the applicable reporting
framework, and in compliance with the cost accounting standards;
- selection and consistent application of appropriate cost accounting policies;
- allowing access to the auditor all information, including the books of accounts, vouchers, cost records,
other records, documents, and other matters of the company, which are relevant to the preparation of
the cost statements;
- providing additional information that the cost auditor may request from the management for the
purpose of cost audit;

- allowing unrestricted access to persons within the company from whom the cost auditor determines it
is necessary to obtain cost audit evidence; and
- giving proper management representation.
The auditee and the cost auditor decides the audit fee and payment schedule; and finally, the cost auditor gets
an engagement letter.
Stage-III Steps – Understanding the Company’s Business
• The cost auditor is required to understand the company’s business, its corporate structure and various
systems followed. It includes:
- The company, its nature of activities, its size, product profile, unit locations, ownership structure,
management structure, organisational structure, marketing set-up, accounting set-up, etc.
- The nature of the industry or the sector in which client company operates
- The applicable regulatory framework, financial reporting framework and cost reporting framework
- The company’s production process, product details, joint or by-products, outsourcing, if any
- Details of subsidiaries, associates and joint ventures
- Key personnel in all departments including in Finance, Accounts, Costing, IT, Administration,
Production, Purchase, Sales, etc
- Purchase policy, sales policy, pricing policy, export/import policy
- Inventory receipt, storage, issue & pricing policies; physical verification system; inventory
management system
- Related parties and nature of transactions with them
- Indirect tax structure, as applicable
- Internal Control Systems followed by the company
- Internal Audit System, its scope & adequacy of coverage as well as effectiveness
- Accounting Systems & Policies followed by the company
- Cost Accounting System & Policies followed by the company
- Company’s MIS system, risk identification & management system
- IT architecture followed for financial accounting and for cost accounting; IT policy, control checks
authorization checks; IT data security policy
- Previous auditor’s report
Stage-IV Steps – Planning the Audit
Planning the audit include
• Timing [dates] and duration [no. of days] of audit period; including plan to visit the unit(s)
• Level and number of audit personnel to be deployed;
• Audit partner to be deployed;
• Drawing up an overall audit plan and audit strategy
• Deciding the materiality levels & sampling levels
• Formulating appropriate audit procedures likes obtaining - Management Representation;
Management Assertion; Test of Controls, Test of Details, Substantive procedures; Analytical
procedures etc
• Key inputs for planning are knowledge from previous audits and other engagements with the
company
• nature, timing and extent of resources required for the audit
Stage-V Steps – Execution of Audit

- Perform the audit checks and procedures, as planned

- Collect all required audit evidence enabling the auditor to form his opinion. The audit evidence should
be – a) relevant and reliability; b) accurate, complete and sufficient; c) from a verifiable source
- Prepare draft observations & discuss with key management personnel
- Prepare final audit report
Stage-VI Steps – Audit Documentation
- Document audit plan, audit strategy

- Document all working papers
- Document all the audit evidences
- Document draft observations and discussions
- Document final report
- Preserve all documents in a bound folder/file for the prescribed period

Objective Type Questions
Fill in the blanks: (answer in bracket)
1. Cost audit was initially introduced in the year ————— .(1965)

2. According to CAS 8 on utilities the cost of maintaining stand-by utilities is ————— cost.
(committed)
3. Efficiency audit ensures ————— return on Capital Employed.(optimum)
4. Equalized transportation cost means ————— transportation cost incurred during a specified
period. (average)
5. Value addition is the difference between ————— and the cost of bought out materials and
services. (net output value)
6. CAS 5 deals with ————— (equalized cost of transportation).
7. ————— ensures that every rupee invested in capital or other fields gives optimum returns.
(Efficiency)
8. Variances due to abnormal reasons ————— form part of cost. (will not. note: This is as per
Generally Accepted Cost Accounting Principles)
9. XBRL is a language based on ————— (XML family of languages)
10. Costing Taxonomy is best defined as a ————— (dictionary)
11. Management audit requires ————— approach.(inter-disciplinary)
12. ISO 9000 certification is an ————— service. (assurance)
13. Corporate objectives represent the ————— for the organization as laid down by itself (charter)
14. The two techniques available for Social Cost Benefit Analysis are ————— and —————.
(UNIDO, Little and mirrlee’s approach.)
15. Energy audit means the monitoring of energy efficiency of different ————— and ————— in
a plant. (equipment, process)
16. The main emphasis of Management Audit is problem ————— rather than problem —————
(identification, solving)
17. Management audit can be a ————— for managerial control.(potent tool)
18. ————— cannot be delegated.( Responsibility)
19. A corporate development audit is an ————— ————— study of organisation’s capabilities.
(independent, objective)
20. “Personal Management” is that part of management function which is primarily concerned with the —
——————— within an organization. (human relationship)
21. ————— is the evaluation of every resources declared in the industry. (Productivity Analysis.)
22. ————— of Companies Act 2013 deals with Internal Audit. (Section 138)
23. An audit programme is a ————— plan of the auditing work to be performed, specifying the
procedures to be followed in verification of each item and the financial statements and the estimated
time required. (detailed)
24. An audit report is a ————— where internal audit summarizes its work on an audit and reports its
findings and recommendations based on that work. (formal document)
25. Section 17 (2) of the ————— specifically requires the auditor to conduct an examination of the
overdue debts, if any, and a valuation of the assets and liabilities of the society. (co-operative societies
Act, 1912)
26. Field Balance Sheet Approach to audit can be applied in audit of ————— (self-help Group)
27. The Local bodies in India are broadly classified into ————— categories. (two)
28. Audit of government ————— is one of the major components of government audit conducted by
the office of C & AG. (expenditure)

29. Under ‘propriety audit’, the auditors try to bring out cases of ————— expenditure even though
the expenditure has been incurred in conformity with the existing rules and regulations. (improper,
avoidable, or in fructuous)
30. Statutory corporations are created by ————— statues (specific)
31. The auditor of a government company is appointed by the ————— (C&AG)
32. The Cost Audit Report is required to be in conformity with the 'Cost Auditing Standards' as referred
to in section ___________of the Companies Act, 2013. (148)
33. Power generation, Telecommunication services fall in ______________ sector as per Companies
(Cost Records and Audit) Rules, 2014. (Regulated)
34. The FOREX component of imported material cost shall be converted at the rate on the date of the
_______________. (Transaction)
35. The review of Organization Plan, Policies, Structure are done through ________audit. (Management)
36. Cost Accounting Standard on Cost of Service Cost Centre is dealt in _____________. (CAS – 13)
37. The Companies are required to maintain Cost Records if turnover exceeds ____________ crores or
more during immediately preceding Financial Year in respect of the products and services specified.
(INR 35 crores)
38. Finance costs incurred in connection with the acquisition of materials _____________ form part of
material cost. (Shall not)
39. The systematic examination, analysis and appraisal of management’s overall performance is done in
________audit. (Management Audit)
40. Cost Accounting Standard on Repairs and Maintenance Cost is dealt in ____________. (CAS-12)
41. Any casual vacancy in the office of a cost auditor, shall be filled by the Board of Directors within
_______________ days of occurrence of such vacancy. (30)
42. Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 deals with the ________________.
(applicability of Cost Audit)
43. Abnormal Loss due to flood or earthquake is charged to _____________. (Costing Profit / Loss
Account)
44. Financial Position and Ratio Analysis has to be computed based on ________ data. (Audited
Financial)
45. Responsibility Centre is ___________ group of control centres. (a personalized)
46. The Cost Audit Report along with the observations shall be filed in Form CRA _____________.
(CRA3)
47. The excisable goods not sold but used for consumption for manufacture in the production of other
articles should be valued at _____________ of cost. (110%)
48. 'Sugar and Industrial Alcohol' belong to __________________ sector for the purpose of Application
of Cost Records. (Regulated)
49. Administration Overheads is dealt in CAS ______________ . (11)
50. Cost Auditing Standard 102 deals with ______________ . (Cost Audit Documentation)

State whether following statements are “True” or “False” with reasoning/ justification for your answer.
(Answer within bracket)
1. Cost Audit is synonymous with efficiency audit. (True. The Cost audit Report mainly comment on the
efficiency of the company namely, utilization aspect of the factors of production)
2. Donations given to Charitable Institutions should not form part of Cost Accounts. (true. expenses on
account of donations is purely financial in nature, hence excluded from Cost Accounts.)
3. Market research cost is not a part of Research and Development Cost. (true. market research is part of
selling and Distribution cost.)
4. CAS 9 deals with indirect material cost. (false. CAS 9 deals with packing material cost.)
5. Part B of the Annexure to Cost Audit Report relates to service sector. (false. part B of the annexure to
cost audit report relates to manufacturing sector)
6. Quantitative Information as part of Annexure to Cost Audit Report needs to be shown for Current
Year only. (false. quantitative information as part of annexure to cost audit report needs to be shown
for current Year and previous Year.)
7. Excess recovery of Excise is income purely financial in nature. (the statement is true.)
8. Profit reconciliation for the company as a whole is dealt in Part C of the Annexure to Cost Audit
Report. (False. Profit reconciliation for the company as a whole is dealt in Part D of the Annexure to
Cost Audit report.)
9. CAS 24 deals with treatment of Revenue in cost statements.(true)
10. As per Companies (Cost Records and Audit) Rules, 2014, Profit Reconciliation (for company as a
whole information is required to be given for Current Year and Previous 2 years. (false. information
need to be given for Current Year and Previous Year only)
11. There are no fixed items of evidence to be checked by Management Auditor. (true. a management
Auditor has to rely more on his experience and acumen to identify areas of review.)
12. Dumping is an ‘illegal’ practice. (false. Dumping is an ‘unfair’ practice.)
13. Assurance engagements involve three separate parties. (true. the parties are a public accountant in
practice, a responsible party and intended users.)
14. The main emphasis of Management Audit is problem identification rather than problem solving. (true
Management Audit pinpoints the areas requiring attention of management, it evaluates the existence
of well defined objectives , it seeks to review appraise and evaluate the corporate plans and policies
based on certain standards of objectivity.)
15. Zero base budget (ZBB) system was modeled by Peter A. Woodcock. (False. ZBB System was
modeled by peter A. Phyrrh.)
16. There is no need for Management Audit Programme. (false. management audit programme is
prerequisite to conduct audit and help the auditor to cover the entire area of function thoroughly.)
17. management audit is voluntary (True. It is undertaken by Management as it helps in effective
functioning of every area of operations coming under management perview.)
18. Important point in Corporate planning is SWOT analysis. (True. A SWOT-strengths, weaknesses,
opportunities and threats analysis can help identify and understand key issues affecting the business)
19. Management Audit Report is to be submitted to Cost Audit Branch. (false. management audit report is
to be presented to the management.)
20. The concept of Financial Audit was developed by T. G Rose. (false. T. G. rose developed the concept
of Management Audit as a logical system of evaluating the quality of Management.)
21. Internal auditing is one time activity. (False. It is a continuous and systematic process of examining
and reporting the operations and records of a concern.)

22. Internal Audit can be performed by employees of an organization. (true. internal audit is a
management tool performed by employees of the organization or external agencies specially assigned
for this purpose.)
23. Internal Audit is not discussed in Companies Act 2013 (false. internal audit is discussed in section 138
of companies act 2013.)
24. Internal audit is applicable for every listed company. (true. as per rule 13 of companies (accounts)
Rules, 2014, every listed company has to appoint internal auditor.)
25. Internal control system can be classified in three types. (True. Preventive Control, Detective Control
and corrective control.)
26. There is no requirement of Audit Working Papers while conducting audit and they only result in loss
of time. (false. audit working papers are the record of the planning and execution of the audit
engagement. Auditors retain a set of working papers for each audit engagement for each year.)
27. Audit working papers are property of the company.(False. Working papers are the property of the
auditor.)
28. Co-operative auditor to conduct an examination of the overdue debts, if any, and a valuation of the
assets and liabilities of the society while conducting internal audit. (true. section 17 (2) of the
cooperative Societies Act, 1912 specifically requires the auditor to conduct an examination of the
overdue debts, if any, and a valuation of the assets and liabilities of the society.)
29. Internal control is very essential in maintenance of Hotel accounts. (true. pilferage is one of the
greatest problems in any hotel and it is extremely important to have a proper internal control to
minimize the leakage.)
30. Every listed Company should have Audit Committee. (True. The Board of directors of every listed
company and the certain classes of companies, as prescribed under Rule 6 of Companies (Meetings of
Board and its powers) Rules, 2014 shall constitute an Audit Committee.)
31. Part-D Para-4 of the Annexure to cost Audit Report under the companies (Cost Records and Audit)
Rules 2014 deals with Profit Reconciliation (for the company as a whole).(False)
32. Cost Audit and Management Audit are one and the same. (False)
33. Main objective of Internal Audit is to prevent errors and frauds. (False)
34. Government Audit does not comment on economy and efficiency other than viewing on fairness of
financial statement. (False)
35. A Limited liability partnership firm registered under the Limited Liability Partnership Act, 2008 can
be appointed as Cost Auditor of a company. (True)
36. As per CAS-6 the Forex Component of imported material is converted at the rate on date of payment.
False (The statement is false. As per CAS6, The forex component of imported material is converted at
the rate on date of transaction)
37. Operational Audit is a Micro Level Management Audit. True (The statement is true. The objective of
operational audit is to appraise the effectiveness and efficiency of a division, activity, or operation of
the entity in meeting organizational goals).
38. Exemptions from application of the Rules are provided to Companies whose revenue from exports, in
foreign exchange, exceeds 50% of total revenue and companies operating from Special Economic
Zones. False (The statement is false. The requirement of Cost Audit under these rules shall not apply
to companies whose revenue from exports in foreign exchange exceed 75% of total revenue and
companies operating in special economic zone).
39. XBRL is a language based on XML family of languages. True (The statement is true. XBRL is an
XML based technology and can be used to store or transport data).
40. In case of utilities generated for the purpose of inter unit transfers, the distribution cost incurred for
such transfers need not be added to the cost of utilities. False (The statement is false. In case of

utilities generated for the purpose of inter unit transfers, the distribution cost incurred for such
transfers shall be added to cost of utilities)
41. CAS 11 deals with Packing Material Cost. (False)
42. Interest and Finance charges are part of cost of production. (False)
43. All expenses that can be identified or linked with the cost object are termed as Direct Expenses.
(True)
44. A favourable budget variance is always an indication of efficient performance. (False)
45. A job worker listed under Table A or B of the Rules and paying Excise Duty on behalf of the
principal need not maintain cost records even if the transactions exceed the threshold limit. (False)
46. The Cash Discount allowed on Cash Sales will be charged to Selling and Distribution overheads.
(False)
47. 'Related Party Transaction' means transfer of resources or obligations among persons related by blood
relations. (False)
48. The Audit Committee should recommend appointment and remuneration of the Auditor and also
review and monitor the Auditor's independence and performance. (True)
49. Maximum amount of penalty payable by a Cost Auditor for non-compliance with the provisions of
Companies (Cost Audit Report) Rules, 2014 is Rs. 5,000. (False)

Short questions
1. What you understand by “True and Fair Cost of Production.”?

ans: The concept of “True and Fair Cost of Production” is used in the context of cost audit wherein the
cost auditor has to state whether in his opinion the company’s cost accounting records have been kept
so as to give a true and fair view of the cost of production, processing and marketing of the product.
2. What constitutes the cost records under Rule 2(e)?

ans: Cost records “means books of account and other records relating to utilization of materials, labour
and other items of cost as applicable to the production of goods or provision of services as provided in
section 148 of the Act and these rules. The Act here refers to The Companies Act 2013. Rule refer to
Cost (Records and Audit) Rule, 2014.
3. Define Cost Auditor.

ans: Rule 2(c) of the Companies (Cost Records and Audit) Rules , 2014 means a Cost Accountant in
practice, as defined in clause (b), who is appointed by the Board.
4. How would you treat demurrage charges as per CAS 15?

ans: As per CAS 15 relating to Selling and Distribution overheads, any demurrage or detention charges, or
penalty levied by transportation or other authorities in respect of distribution activity shall not form
part of the selling and distribution overhead.
5. How is cost computed if service is provided by contractors as per CAS 13?

ans: Cost of services rendered by contractors within the facilities of the entity shall include charges
payable to the contractor and cost of materials, consumable stores, spares, manpower, equipment
usage, utilities, and other resources provided to the contractors for such services. Cost of services
rendered by contractors at their premises shall be determined at invoice or agreed price including
duties and taxes, and other expenditure directly attributable thereto net of discounts (other than cash
discount), taxes and duties refundable or to be credited. This cost shall also include the cost of
resources provided to the contractors.
6. How would you treat Employee share options under Generally Accepted Cost Accounting Principles ?
ans: Cost of employee share options is treated as part of employee cost provided the same is not a notional
cost and involves an actual cash outlay.
7. What is XBRL?
ans: XBRL (eXtensible Business Reporting Language) is a language based on XML (Extensible Markup
Language) family of languages. It is an open standards-based reporting system that is built to
accommodate the electronic preparation and exchange of business reports around the world using
internet as a medium. It has been defined specifically to meet the requirements of business and
financial information.
8. How would you treat the abnormal cost?

ans: The abnormal cost must be excluded from computation of Cost .
9. How will you treat an item of Direct Expenses that does not meet the test of materiality as per CAS
10?

ans: If an item of Direct Expenses does not meet the test of materiality, it can be treated as part of
overheads.
10. Can a Cost Accountant who is appointed as the Concurrent Auditor of a company be appointed as
Cost Auditor of the same company?
ans: A Concurrent Auditor may be viewed as a person holding an office of profit of the company and so
cannot be appointed as Cost Auditor of the same company.
11. How should a Cost Auditor evaluate MIS of an organization?

ans: A Cost Auditor should take into consideration the following aspects while evaluating MIS of an
organization: a) Content, quality and source of information; b) Flow of information correlation of
information in decision areas.
12. What is productivity audit?

ans: Productivity audit is the process of monitoring and evaluating organizational practices to determine
whether functions, programmes, and organization itself are utilizing resources effectively and
efficiently so as to accomplish objectives.
13. What do you understand by environment audit?

ans: Environment Audit is a systematic , documented, periodic and objective review by related entities , of
facility operations and practice related to meeting environment requirements.
14. a management audit team should be multidimensional. discuss.

ans: As a management auditor is concerned with all aspects of business and the organization , ranging
from manufacture to marketing and finance , the management audit team should be multidisciplinary
to make multidimensional approach to audit function.
15. What are the Management Audit Questionnaires?

ans: A management audit questionnaire is an important tool for conducting the management audit. It is
through these questionnaires that the auditors make an inquiry into important facts by measuring
current performance. Such questionnaires aim at a comprehensive and constructive examination of an
organisation’s management and its assigned tasks.
16. What is Energy Audit?

ans: Energy auditing is defined as an activity that serves the purposes of assessing energy use pattern of a
factory or energy consuming equipment and identifying energy saving opportunities.
17. Write short not on “Customer Costing in Service Sector”.

ans: For customer costing purpose, the cost are divided into following categories. These are:
Customer specific costs-Like the cost of express conveyer to a client/customer who requests oversight
delivery of some important document. Customer line categories- these are the costs which are broken
into the broad categories of customers and not individual customer.
Company costs- those costs which are not allocated to either customer line or individual customers but
charge to company. The example is the cost of advertisement to promote sale of service.
18. What is “Consumer Services “ Audit?

ans: Consumer Service Audit is based on the philosophy that role of business should be quality of life
through its contribution in terms of better product quality and services.
19. What to you understand by Corporate Strategy?

ans: Corporate strategy or policy is the strategy that determines the means for utilizing resources in the
areas of production, finance, research and development, personnel, and marketing to reach the
Corporate Objectives.
20. What is “Personnel Management”?

ans: “Personnel Management” is that part of the management function which is primarily concerned with
the human relationships within an organization. Its objective is essentially the maintenance of those
relationships, which enable all those engaged in the undertaking to make their maximum personal
contribution to the effective working of that undertaking.
21. What do you understand by Audit Report?

ans: An audit report is a formal document where internal audit summarizes its work on an audit and
reports its findings and recommendations based on that work. Audit report will be an indicator of the
usefulness of the internal audit functioning in the organization.
22. Which section of Companies Act deals with Internal Audit?

ans: Section 138 of the Companies Act 2013 deals with provisions of Internal Audit.
23. What is Audit programme?

ans: An audit programme is a detailed plan of the auditing work to be performed, specifying the
procedures to be followed in verification of each item and the financial statements and the estimated
time required. To be more comprehensive, an audit programme is written plan containing exact details
with regard to the conduct of a particular audit.
24. State the functions of summary report to Top Management.

ans: Summary reports to management usually would have two distinct functions – (i) They would tell
what the internal audit department has accomplished when compared to what was planned. (ii) They
would show conclusions of the auditors in a summarised form.
25. How do you classify Local Bodies?

ans: The Local bodies in India are broadly classified into two categories. The local bodies constituted for
local planning, development and administration in the rural areas are referred as Rural Local Bodies
(Panchayats) and the local bodies, which are constituted for local planning, development and
administration in the urban areas are referred as Urban Local Bodies (Municipalities).
26. What do you understand by Propriety Audit in the Context of Government Audit.
ans: Under ‘propriety audit’, the auditors try to bring out cases of improper, avoidable, or infructuous
expenditure even though the expenditure has been incurred in conformity with the existing rules and
regulations.
27. How are NGO(s) incorporated?

ans: Non-Governmental Organisations are generally incorporated as societies under the Societies
Registration, Act, 1860 or as a trust under the India Trust Act, 1882, or under any other law

corresponding to these Acts enforced in any part of India. NGO’s can also be incorporated as a
company under section 8 of the Companies Act, 2013.
28. What is the first step in audit of Educational Institutions?

ans: To examine the Trust Deed, or Regulations in the case of school or college and note all the provisions
affecting accounts. In the case of a university, refer to the Act of Legislature and the Regulations
framed thereunder.
29. What are the two types of Audit files?

ans: In case of recurring audits, some working papers files may be classified into permanent audit files
and current audit files: while the former is updated with the Information of continuing importance, the
latter contains information relating to audit of a single period.
30. Who can be appointed as Internal Auditor as per the Companies Act, 2013?
ans: AS per Section 138 of the Companies Act , 2013 an internal auditor, shall either be a chartered
accountant or a cost accountant, or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company.
31. The Cost Auditor of a company was offered to act as ERI (e-Return Intermediary) for filing income
tax related matter on behalf of one of its subsidiary company. Can the Cost Auditor accept the
assignment?
Ans: Any person who is engaged in consulting and providing specialised services to the company and its
subsidiary companies becomes ineligible to act as cost auditor. (Sec. 141 and 144 of the Companies
Act, 2013). The Cost Auditor cannot accept the assignment as long as he remains appointed as cost
auditor of the company.
32. Explain 'Corporate Development Audit.'

Ans: A corporate development audit is an independent objective study of an organization’s capabilities.
Corporate development audit is a comprehensive task to assist the corporate management in various
aspects of development through a process of systematic review and evaluation of long-term strategies
of the company.
33. Whether the companies (Cost Records and Audit) Rules 2014 is applicable to a company which is
generating electricity for captive use?
Ans: The companies (Cost Records and Audit) Rules 2014 is applicable to a company which is engaged in
Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory
body or authority under the Electricity Act, 2003 (36 of 2003); other than for Captive generation.
34. How would you treat demurrage charges as per CAS-15?

Ans: As per CAS-15 relating to selling and distribution overheads, any demurrage or detention charges, or
penalty levied by transportation or other authorities in respect of distribution activity shall not form
part of the selling and distribution overhead.
35. What is the time limit within which the cost Auditor of the company should submit his report?
Ans: As per rule 6 (5) of the Companies (Cost Records and Audit) Rules 2014, every Cost Auditor shall
forward his report to the Board of Directors of the Company within a period of one hundred and
eighty days from the closure of the financial year to which the report relates.

36. Whether all petroleum products are covered under the Companies (Cost Records and Audit) Rules,
2014?
Ans: The Companies (Cost Records and Audit) Rules, 2014 is applicable to all petroleum products
regulated by the Petroleum And Natural Gas Regulatory Board Act, 2006 (19 of 2006) and covered
under CETA Heading No. 2709 to 2715.
37. Explain the tenure of a Cost Auditor of the Company.

Ans: Every cost Auditor appointed as per Rule 6 (1) & (2) shall continue in such capacity till the expiry of
180 days from the closure of the financial year or till he/she submits the cost audit report for the
financial year for which he/she has been appointed. [Rule 6(3)]
38. Who is the approving authority to whom the Cost Audit report shall be submitted by the Cost auditor?
Ans: The report on the audit of cost records shall be submitted by the Cost Auditor to the Board of
Directors of the Company. [Rule 6(5)]
39. Whether each and every transactions with Related Parties is to be disclosed under (Part - D, Para - 5)
of Annexure to the Cost Audit Report?
Ans: Details of Related Party Transaction are required to be provided in respect of each Related Party and
each Product/Service for the year as a whole and not transaction wise.
40. Define Corporate Branding.

Ans: Corporate Branding: Corporate Branding is the process of creating a favorable reputation of the
company and its constituent elements. It is an important organizational resource that enables to create,
strengthen and sustain competitive advantage.
41. What means 4-digit CETA Code as explained in the Companies [Cost Records and Audit] Rules,
2014?
Ans: Rule 2 (aa) of the Companies (Cost Records and Audit) Rules 2014 states that "Central Excise Tariff
Act Heading'' means the heading as referred to in the Additional Notes in the First Schedule to the
Central Excise Tariff Act, 1985 [5 of 1986] in respect of goods a description in list of tariff provisions
accompanied by a four digit number and includes all sub-headings of tariff items the first four-digits
of which correspond to that number.
42. How the valuation is to be done for goods captively consumed in one‟s own factory?
Ans: Rule 8 of the Central Excise Valuation Rules provides that where the excisable goods are not sold
but are used for consumption by the assessee or on his behalf in the production or manufacture of
other articles; the value shall be 110% of the cost of production or manufacture of such goods. The
procedure for determination of cost of production for captive consumption is laid down in CAS(4)
[Cost Accounting Standards-4] issued by the Council of the Institute of Cost Accountants of India.
43. What are 'Industry-specific Operating Expenses'?
Ans: Industry-specific Operating Expenses are those which are peculiar to a specific industry. For
example, Telecommunications industry shows expenses such as Network Operating cost, License fee,

Radio Spectrum charges, Microwave charges, etc., which are peculiar to this industry. The industry-
specific operating expenses shall have to be identified and reported in the abridged cost statement.
44. How to treat overtime premium as per CAS 7 related to Employee Cost?
Ans: Overtime premium shall be assigned directly to the cost object or treated as overheads depending on
the economic feasibility and specific circumstances requiring such overtime.
45. State the broad objectives of 'Operational Audit'.
Ans: Operational Audit is an organized search for the ways to improve efficiency and effectiveness. It has
the broad objectives of a) Appraisal of Controls, b) Evaluation of Performance, c) Appraisal of
Management Objectives, and d) Appraisal of Organization Structure. All large organizations conduct
Operational Audit for better management and higher profitability.
46. State the factors on which audit documentation will depend.
Ans: The content and form of audit documentation will depend on a number of factors, such as (a) the size
and the complexity of the operations of the audited, (b) the extent of computerization of the cost records,
(c) the assessed risks of material misstatement of costs, (d) the cost audit methodology and tools used, and
(e) the nature of the audit procedure to be performed.
47. What is the Central Excise Tariff Act Heading as per the Companies (Cost Records and Audit) Rules,
2014?
Ans: Central Excise Tariff Act Heading as per Companies (Cost Records and Audit) Rules, 2014, means
the Heading as referred to in the Additional Notes as per the First Schedule of the Central Excise and
Tariff Act. ‘Heading’, in respect of ‘goods’ means a description in respect of tariff provisions
accompanied by a four-digit number and includes all sub-headings of all tariff item the first four digits of
which correspond to that number.
48. State the meaning of the term 'Key Performance Indicators'.
Ans: Key Performance Indicators are simply the variables, independent or interdependent, in respect of
which goals can be set and performance can be measured to assess whether it is in furtherance of the
enterprise objectives. These may be quantitative, qualitative, actionable, or trends. For evaluation of
performance, the choice of the indicators should be made correctly in tune with the objectives.
49. What is meant by 'Cost Records'?
Ans: As per Rule 2 (e) the Companies (Cost Records and Audit) Rules 2014, 'cost records' means 'books
of accounts relating to utilization of materials, labour and other items of cost as applicable to the
production of goods or provision of services as provided in Section 148 of the Act, and these Rules'.
There cannot be any exhaustive list of cost accounting records. Any transaction statistical, quantitative or
other details - that has a bearing on the cost of the product /activity is important and form part of the cost

accounting records. Cost records are to be kept on regular basis to make it possible to "calculate per unit
cost of production/operations, cost of sales and margin for each of its product for every financial year on
monthly/quarterly/half-yearly/annual basis"
50. How the Demurrage Charges be treated as per the CAS 15?
Ans: The CAS 15 deals with Selling and Distribution Overhead. As per CAS 15 any demurrage or
detention charges, or penalty levied by transportation or other authorities in respect of distribution activity
shall not form part of the selling and Distribution Overhead.
51. What are the objectives of the Cost Audit Standard 104?
Ans: The objective of the Cost Audit Standard 104 is to enable the cost auditor to have knowledge of the
client's business, which is sufficient to identify and understand the events, transactions and practices that
in the cost auditor's judgment may have a significant effect on the examination of the cost statements or
on the preparation of the Cost Audit Report.
52. Explain the 'Ageing Analysis' of Receivables.
Ans: Accounts Receivable Ageing Analysis is a periodic report that categorizes a company's accounts
receivables according to the length of the time an invoice has been outstanding .It is used as a gauge to
determine the financial health of a company's customers. If an account receivables ageing demonstrates
that a company receivables are being collected much slower than normal, this is a warning sign that
business may be slowing down or that the company is taking greater credit risks in its sales practices.
53. What is the scope of Government Audit?
Ans: Governmental Audits are done by the Comptroller and Auditor general of India for financial
statements of Government as per some declared standards. However, it goes a step beyond those standards
that are applicable to audit of financial statements. The scope of a governmental audit is composed of
three elements. 1. Financial Compliance 2. Economy and Efficiency 3. Results. The typical definition of a
financial audit would not include the elements 2 and 3. These are Operational Auditing Techniques.
54. State the basic objective to prepare a report on Performance Appraisal.
Ans: The basic objective to prepare a report on Performance appraisal is to provide an actionable insight
into costs and profitability for the management in strategic and operational context. It aims at discovering
various drivers of costs and profitability and their impact on the selected performance variables. It would
help the organisations:
• To improve profits and profitability

• To optimize resource allocation
• To optimize the product and Services Portfolio

Choose the correct answer with short justification/working.
1. Part C of the Annexure to the Cost Audit Report in CRA 3 deals with ________.
(a) Manufacturing Sector
(b) Service Sector
(c) Regulated Sector
(d) Unregulated Sector
2. Cost Accounting Standard 8 is a Cost Accounting Standard on ___________.

(a) Employee Cost
(b) Utilities Cost
(c) Pollution Control Cost
(d) Selling and Distribution Cost
3. Under the Generally Accepted Cost Accounting Principles, the cost of cane supplied from own
farm to the sugar mill is treated as ___________.
(a) Direct Materials Cost
(b) Indirect Materials Cost
(c) Production Overhead
(d) Administrative Overhead
4. Constitution of Audit Committee by the Board of Directors is mandatory for _________.

(a) all companies
(b) all listed companies only
(c) all listed companies and those prescribed under the Companies (Meetings of Board and its
Powers) Rules only
(d) all public companies having turnover of Rs. 100 crore or more only
5. Cost Auditing Standard 102 deals with ______________.

(a) planning an Audit of Cost Statements
(b) Cost Audit Documentation
(c) knowledge of process and business
(d) overall objectives of the Independent Cost Auditor
6. As per the Central Excise Valuation Rules 2000, the assessable value of goods used for captive
consumption is __________.
(a) at actual cost of production of such goods
(b) at marginal cost of production of such goods
(c) at 110% of cost of production of such goods
(d) at market price of such goods
7. A cotton textile mill had cumulative waste percentage of 8% in Blow Room, 6% in Carding, 4%
in Drawing, 4% in Simplex and 9% in Ring Frame. For an input of 1000 kg. of cotton in Blow
Room, the output at Ring Frame is _________.
(a) 730.27 kg.
(b) 725.27 kg.
(c) 742.27 kg.

(d) 749.97 kg.
8. Operational Audit can lead to better management with the focus on ________.
(a) transaction-based analysis for fraud prevention
(b) compliance of rules
(c) risk identification, process improvement
(d) budget monitoring
9. A shoe manufacturing company has a plant capacity of producing 700 shoes per shift. During the
year of 300 working days, 3 shifts of 8 hours with half-hour recess per shift, it produces 35.91
lakh shoes. The Normal Capacity Utilization percentage is ____.
(a) 82%
(b) 76%
(c) 74%
(d) 78%
10. Propriety Audit in the context of Government Audit seeks to ensure that _______.
(a) public money are not spent for the benefit of a particular person
(b) public officer should exercise same vigilance as in respect of expenditure of his/her own
money
(c) no authority should pass an order which will be directly or indirectly to its own advantage
(d) All the above
11. The Cost Accounting Standard 15 is a Cost Accounting Standard on _______.

(a) Employee Cost
(b) Utilities Cost
(c) Pollution Control Cost
(d) Selling and Distribution Overheads Cost
12. Overall Objectives of the independent Cost Auditor and conduct of an Audit in accordance with
Cost Auditing Standard is dealt in _____________.
(a) Cost Auditing Standard 101
(b) Cost Auditing Standard 102
(c) Cost Auditing Standard 103
(d) Cost Auditing Standard 104
13. A company, engaged in construction business, is covered under the Companies (Cost Records
and Audit) Rules, 2014 but does not include _____________.
(a) outsourcing by a sub-contracting company
(b) a company working on BOT (Build, Operate, Transfer) mode
(c) a company working in a Special Economic Zone
(d) a project undertaken as EPC (Eng., Procurement, Constn.) contract
14. A manufacturing unit showed, during the Financial Year 2016-17, the following financial data
(in Rs. lakh): Net Sales 1,250, Export Incentives 85, Other income 106, Adj. of Finished Stock
(+) 95, Materials 634, Salaries 425, Overheads 101.8, and Tax 52.6. The Value Added as per
Rules is (in Rs. lakh) _____________.

(a) 946
(b) 796
(c) 755
(d) 688
15. Royalty paid on production Rs. 35,000, Job Charges Rs. 20,000, Special Design Charges Rs.
20,000, Software Development Charges related to Production Rs. 27,000, and Travelling abroad
for Training Rs. 25,000 The Direct Expenses as per CAS 10 is Rs. _____________.
(a) 92,000
(b) 1,00,000
(c) 1,02,000
(d) 1,27,000
16. Operational Audit can lead to better management with the focus on_____________.
(a) Transaction-based analysis for Fraud Prevention
(b) Compliance of Rules
(c) Risk Identification, Process Improvement
(d) Budget Monitoring
17. Penalty paid to PF authorities is _____________ in Employee Cost.

(a) included
(b) excluded
(c) based on individual case
(d) partly included
18. Item appearing only in Cost Records is _____________.

(a) Profit on Sale of Assets
(b) Interest Received
(c) Loss on Sale of Assets
(d) Notional Interest on Capital
19. _____________ Analysis is evaluation of every resources declared in the industry.

(a) Capacity
(b) Energy
(c) Productivity
(d) Efficiency
20. Which one of the following is not a professional misconduct in relation to Cost Accountants in
Practice as per the Second Schedule of The CWA Act, 1959?
(a) He/she fails to invite attention to any material departure from the generally accepted
procedure of costing and pricing applicable to the circumstances.
(b) He/she does not exercise due diligence or is grossly negligent in the conduct of his/her
professional duties.
(c) He/she fails to report a material misstatement known to him/her to appear in a cost or
pricing statement with which he/she is concerned in a professional capacity.
(d) In the opinion of the Council, he/she brings disrepute to the Profession or the Institute as a
result of his/her action whether or not related to his/her professional work.

21. In which CRA Form, is the Cost Audit Report of a company filed with the Central Government?
(a) CRA-4
(b) CRA-3
(c) CRA - 1
(d) CRA-2
22. CAS 23 deals with .........................................

(a) Quality Control
(b) Manufacturing Cost
(c) Overburden Removal Cost
(d) Treatment of Revenue in Cost Statements
23. As per the Cost Auditing Standard 101, the risk of Material Misstatements has two components,
viz., ……………………………..
(a) Inherent Risk and Control Risk
(b) Detection Risk and Audit Risk
(c) Material Risk and Implicit Risk
(d) Financial Risk and Explicit Risk
24. As per Part D, Para 4 of the Companies (Cost Records and Audit) Rules, 2014, Value Addition
and Distribution of Earnings are to be computed based on
(a) Audited Financial Data
(b) Cost Record Data
(c) Unaudited Financial Data
(d) Both (a) and (b)
25. The audit of data or information, depicting social performance of a business in contrast to its
normal economic performance as measured in financial audit, is
(a) Energy Audit
(b) Efficiency Audit
(c) Social Audit
(d) Propriety Audit
26. The figures below are available for Good Luck Limited. Budgeted Production - 900 units,
Standard Hours per unit -10, Actual Production – 720 units and Actual Working - 6000 hours.
What is the Efficiency Ratio?
(a) 110%
(b) 120%
(c) 100%
(d) 125%
27. Which of the following is not a Professional Misconduct as per the First Schedule of The CWA
Act, 1959, in relation to the Cost Accountants in Practice?
(a) Pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his/her professional work, to any person other than a member
of the Institute or a partner or a retired partner or the legal representative of a deceased partner.

(b) Enters into a partnership, in or outside India, with any person other than a Cost Accountant in
Practice or such other person who is a member of any other professional body having such
qualifications as may be prescribed.
(c) Advertises his/her professional attainments or services or uses any designation or expression
other than Cost Accountant on professional documents, visiting cards, letter heads or sign boards,
unless it is a degree of a University established by law in India or recognised by the Central
Government or a title indicating membership of The ICAI or any other institution that has been
recognised by the Central Government or may be recognised by the Council.
(d) Expresses his/her opinion on cost or pricing statements of any business or enterprise in which,
he/she, his/her firm or a partner in his/her firm has substantial interest.
28. Remuneration of the Non-Executive Directors is treated as ....................

(a) Employee Costs
(b) Administrative Overheads
(c) Salaries and Wages
(d) Management Expenses
29. The process of determining the elements which correspond to the lines and the columns in a
financial statement and the elements which must be created by extension is called as
(a) Mapping
(b) Name
(c) Concept
(d) Scaling
30. As per the CAS 23, the activity of Overburden Removal that benefits the identified component of
an ore to be mined by the entity is called as ......
(a) Mining Activity
(b) Overburden Removal
(c) Stripping Activity
(d) Advance Stripping
Answer:
1. (B) Service Sector Reason: Part C of the Annexure to the Cost Audit Report in Form CRA 3
pursuant to the Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014, gives
quantitative information and abridged cost statement for services in the Service Sector.
2. (B) Utilities Cost Reason: CAS 8 deals with the Cost Accounting Standard on cost of
utilities.
3. (A) Direct Material Cost Reason: As per the GACAP, Direct Materials Cost includes cost
of procurement and freight inwards of the materials.
4. (iv) (C) All listed companies and those prescribed under the Companies (Meetings of Board
and its Powers) Rules only Reason: The Rule covers all listed companies, public companies
having capital of Rs. 10 crore and more, annual turnover of Rs. 100 crore and more,
outstanding deposits, loans and borrowings of Rs. 50 crore or more.

5. (v) (B) Cost Audit Documentation Reason: The Cost Auditing Standard 102 is to provide
guidance to the members in the preparation of audit documentation in the context of the
audit of cost statements, records and other related documents.
6. (C) At 110% of cost of production of such goods Reason: Liability of Excise Duty arises as
soon as the goods covered under the Excise Duty are manufactured but the Excise Duty is
collected at the time of removal or clearance from the place of manufacture even for captive
consumption.
7. (B) 725.27 kgs. Reason: Output at Ring Frame = 1000 × (100-92)% × (100-94)% × (100-
96)% × (100-96)% × (100-91)% = 725.27 kgs.
8. (C) risk identification, process improvement Reason: The objective is to assist the
organization in performing the functions more effectively and economically with focus on
the efficiency and the effectiveness of the operations, giving an early warning system for the
detection of the potentially-destructive problems.
9. (B) 76% Reason: Available capacity = 300 × (8-0.5) × 3 × 700 = 47.25 lakh units Actual
Capacity Utilization % = 35.91/47.25 = 76%
10. (D) All the above Reason: The objective of Propriety Audit is that public money is not spent
for the benefit of a particular person. Public officer should exercise same vigilance as in
respect of expenditure of his/her own money and no authority should pass an order which
will be directly or indirectly to its own advantage
11. (d) Selling and Distribution Overhead Cost. CAS 15 deals with the principles and methods
of classification, measurement and assignment of Selling and Distribution Overheads, for
determination of the cost of sales of product or service, and the presentation and disclosure
in cost statements.
12. (c) Cost Auditing Standard 103. Cost Auditing Standard 103 deals with the overall
objectives of the independent cost auditor, the nature and scope of a cost audit and
independent auditor’s overall responsibilities when conducting an audit of cost statements in
accordance with cost auditing standards. It also explains the requirements establishing the
general responsibilities of the independent auditor applicable in all audits, including the
obligation to comply with the cost auditing standards.
13. (c) A Company working in Special Economic Zone. As per Rule 4(3) (ii) of the Companies
(Cost Records and Audit) Rules 2014 such units would be outside the purview of cost audit.
14. (b) Rs. 796 Lakh. (Sales 1250 + Export Incentive 85 + Adj of Finished stock 95)-(Materials
634) = Rs. 796 Lakh.
15. (d) Rs. 1,27,000 [direct expenses as per CAS 10 = royalty paid on production + Job charges
+ Special Design Charges + Software development charges related to production +
Travelling abroad for training = Rs. (35,000 + 20,000 + 20,000 + 27,000 + 25,000) = Rs.
1,27,000]
16. (c) Risk identification, process improvement: The objective is to assist the organization in
performing functions more effectively and economically with focus on efficiency and
effectiveness of operations, giving an early warning system for detection of potentially
destructive problems.
17. (b) Excluded Penalty paid to PF authorities is not normal cost and hence is excluded as per
CAS 7 from employee cost.
18. (d) Notional interest on capital This does not involve actual outlay of funds but is included
in cost records as an opportunity cost to determine product cost. The other three items are
not related to actual production and this do not form part of cost records.

19. (c) Productivity The Productivity audit is basically an analysis of the productivity of the
resources deployed by any organization. It is generally done to generate information about
the status of productivity in the organization for the purpose of determining the scale of
efficiency and effectiveness of „resource utilization‟.
20. (d) Bringing disrepute to the profession or the institute is not considered a misconduct as per
the Second Schedule of the CWA Act 1959. It is a misconduct as per the First Schedule, Part
IV of the Act.
21. (a) Reason: Pursuant to Section 148 (6)of the Companies Act, 2013, and Rule 6 (6) of the
Companies (Cost Records and Audit) Rules, 2014, the Cost Audit Report is to be filed in
Form CRA-4 with the Central Government.
22. (c) Reason: Cost Accounting Standard (CAS) 23 is issued by the Council of The Institute of
Cost Accountants of India on "Overburden Removal Cost". It is applicable from 1st April,
2017.
23. (a) Reason: As per the Cost Auditing Standard (CAS-101) on Planning an Audit of Cost
Statements, the risk of material misstatement has two components, viz., Inherent Risk and
Control Risk.
24. (a) Reason: As per part D, para 3 of the Companies (Cost Records and Audit) Rules, 2014,
Value Addition and Distribution of Earnings are to be computed based on Audited Financial
Accounts.
25. (c) Reason: Social Audit is generally defined to be the audit of data or information depicting
social performance of a business in contrast to its normal economic performance as
measured in financial audit. A lot of research and experimentation have been conducted to
devise techniques or models, which can measure the contribution of an enterprise to the
Society.
26. (b) Reason: Efficiency ratio=(Standard Hours of actual Production)/(Actual Hours
Worked)×100 = (720 ×10) / 6,000 ×100 = 120%
27. (d) Reason: As per the Second Schedule Part 1 of the Cost and Works Accountants
Act,1959, a Cost Accountant in Practice shall be deemed to be guilty of Professional
Misconduct, if he/she expresses his/her opinion on cost or pricing statements of any business
or enterprise in which, he/she, his/her firm or a partner in his/her firm has substantial
interest. All the other options are Professional Misconduct as per the First Schedule of The
Cost and Works Accountants Act, 1959 in relation to the Cost Accountants in Practice.
28. (b) Reason: As per the Generally Accepted Cost Accounting Principles (GACAP),
Remuneration of the non-Executive Directors will not be considered as part of Employee
Costs but will be treated as part of Administrative Overheads.
29. (a) Reason: As per the XBRL, Mapping is the process of determining the elements which
correspond to the lines and the columns in a final statement and the elements which must be
created by extension.
30. (c) Reason: As per the Cost Accounting Standard on Overburden Removal Cost, the
Stripping Activity refers to the activity of overburden removal that benefits the identified
component of an ore to be mined by the entity.

ANNEXURES

Cost Audit by Nikhil Gupta Sir

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Audit by Nikhil Gupta Sir

Uploaded by

Copyright:

Available Formats

Cost And Management Audit

(Paper 19 of Final Course - Syllabus 2016)

By CA CS CMA Nikkhil Gupta

Classes Organised at:

Priyanka Saxena Classes

Includes comprehensive coverage of the entire syllabus prescribed by the Institute

Includes discussions on guidance notes on various topics issued by the Institute

Includes the Frequently Asked Questions (FAQs) issued by the Institute

Includes plethora of practical questions to practice each topic appropriately

Includes complete coverage of theory portion prescribed by the Institute

Includes comprehensive coverage of objective type question

Includes the revisions suggested by the Institute in January 2019

For CMA Final Paper 20 – Business Valuation

Dedicated to my grandfather Late Shri Sushil Chand Gupta who

Special mention of my brother CA Mukul who has been a great

Basics of Cost Audit

Section 148 of the Companies Act, 2013

Provided that no person appointed under section What is Section 139?

Priyanka Saxena Classes

Definition and Meaning (June 2009)

Institute of Cost and Works Accountants of India

Relevance of Cost Audit (December 2004)

1) Price control and regulation mechanism

Priyanka Saxena Classes

9) Facilitation of fixation of reasonable price of products and goods

Relevant Section of Provisions

Books of Accounts - “books of account” includes records maintained in respect of—

Priyanka Saxena Classes

Relevant Section of Provisions

Qualifications of a Cost Auditor

- One person Companies

Disqualifications of a Cost Auditor (Section 141 of the Companies Act, 2013)

Priyanka Saxena Classes

* Associates would include –

a) Company’s Holding company;

c) Subsidiary of Company’s Holding

$ Directly or indirectly implies that:-

Priyanka Saxena Classes

Powers of Cost Auditor (Section 143 of the Companies Act, 2013)

Default on the part of Quantum of the penalty

Company - fine of INR 25,000 to INR 500,000

Officer of the Company - imprisonment for 0-1 years and / or

Communication to previous auditor (Courtesy Letter)

Priyanka Saxena Classes

Past Exam Questions

Priyanka Saxena Classes

(i) a director or his relative;

Priyanka Saxena Classes

Priyanka Saxena Classes

Companies (Cost Records and Audit) Rules, 20141

Rule 3: Application of Cost Records

Category B: Unregulated Sector - 33 industries

Priyanka Saxena Classes

Priyanka Saxena Classes

Type of enterprise Manufacturing Industry (Investment in Service Industry (Investment in

FAQs issued by the Institute

Priyanka Saxena Classes

Sales: Manufactured products 43,750

Rule 4: Applicability of Cost Audit

Priyanka Saxena Classes

FAQs issued by the Institute

Priyanka Saxena Classes

Rule 5: Maintenance of Records

In case of delay in filing Form CRA 2 and CRA 4 with MoCA