COST AUDIT STRATEGIES

A BUSINESS COSTING APPROACH

CMA A.N.Raman
 Cost Audit : Strategic and Social Costing CMA skill set

Are the annualised long run cost as

per standards?

•Cost Accounting Standards

Social Cost •Cost Auditing Standards
Attest •Standard Auditing practices
•Industry specific knowledge
COST DATA

•Competition Analysis
•Products/Market segments
•Cost Strategies
Business •System support for DSS.
costing •Cost Attestation also
review
Hence there is a need to
contextualise the Review of adeuacy of Cost
approach to cost audit Management Competency?
to industry . No one size
fits all.
Common Refrain that can emanate
We know our business better than a Cost accountant
reviewing our operations from outside .
The top management team does not have time or
willingness to cooperate with an external auditor to
comment on his operations .
We have got our own management systems set by the
parent company and you can do nothing about it.
Why not you simply comment on areas you want and
walk away with the fees we have fixed.
 Strategic Partnering Mode

CMA Models

Business
Model
Building Blocks of Business Costing (BC)
BC requires a concurrent thinking and is not a Post Facto
analysis of completed Forms or other Cost Sheets for that
matter.
Not a unilateral process but requires an engagement with
management. Hence an engagement process will work well.
Making it as a part of the Governing body agenda.
Should be aligned with the Long and Short term business
plans of the company.
No system duplication but embed participation in existing
processes.
Materiality should be the key to the assurance or the
diagnostic process.
Merge with the current management practices.
 Management Concepts Impacting BC

1. Engagement with Audit Committee on BC Scope

2. Strategic Versus Operational approach to
management.
3. Lead Indicator Versus Lag Indicators
4. Manufacturing Process Versus Business Process
5. Business Model Understanding.
6. Strategies of Operational Excellence
7. Evolution of non financial audit areas such as
Quality Audits, Sustainability Audits, GMP audits,
etc.
8. Throughput Management or Theory of
Constraints.
Engagement with Audit Committee

1. Why this is a must ? Company or the Board as the key

stakeholder of BC . It cannot be a unilateral selection of
reporting areas by the cost auditor .
2. Periodicity of reporting need to be decided .
3. Will give the mandate to the auditor to tackle difficult
behavioral issues.
4. Will set reasonable expectations.
5. Not expected to cover all the listed areas as there should be
a cost benefit approach.
6. A grip on what outcomes are desired.
Some anecdotes we experienced
This is a wonderful move by MCA to improve the
quality of governance-----an independent director.
I want the Cost Auditor henceforth to present to every
board meeting the impact of the cost drivers and the
road map to control them……a leading industrialist.
It is a big opportunity to improve the cost based
decision making systems in our business model and
should be done in the entire group…. An Exe Director.
The Cost Auditor will now become our enabler in a
thorough overhaul of our ERP….. A VP of MIS
 Strategic versus Operational Approach

1. The conventional mindset of cost accountant always drives

towards input output analysis of resources in a manufacturing
process.
2. We even talk of benchmarking norms to comment on this.
This comes from a simple commodity world of 70s and 80s.
3. The competitive environment has divided the management of
enterprises into strategic and operational world.
4. Product segments and market segments.
5. If you look at drivers of sustainable success of IFAC strategic
issues have been separated from operational excellence.
6. Examples from consumer electronics .
Lead Indicator versus Lag Indicator

1. What is meant by a lead indicator ?

2. What is meant by a lag indicator ?
3. How the current business deploys the above concept to
manage business by measurement ?
4. Different Management Accounting tools in multiple
circumstances.
O u t c o m eP br oa cs e ds s B a s e d
Audit Approach

New Process for

Product identifying
Developme material
nt Process waste

Cycle Time Input output

taken in parameters
developing of key
prototype resources .
Strategic Operational
Manufacturing Process Versus Business
Process

1. Conventional costing always talks of manufacturing process

and factory oriented cost centres or departments.
2. Organisations today use the business process language.
3. What is a business process ?
4. Why it is important in New CMA tools like ABC ?
Business Model Understanding

1. What is this language of Business Model ?

2. Why this language today ?
3. How does it align with a business strategy ?
4. Cost Scenario planning and Business Modelling.
Strategies of Operational Excellence

1. Excellence in operational processes as a part of competitive

strategy.
2. Excellence pursuit can be quality based or cost based or time
based.
3. Different strategies can be pursued for different perspectives.
4. Process based or Outcome based reporting of operational
excellence.
5. Lead indicator or lag indicator watch for operational
excellence.
 A CASE STUDY
A TEXTILE mill has several manufacturing modules catering to
both Branded Garmenters and Cloth Processing segment. For both
segments , manufacturing takes place for various cutomers some of
them under HIGGS certification and some not. The price pressure
for revision is driven at varying levels based on the customers
served. The customer needs and servicing requests are also different
including sample processing and batch volumes.

All the products are covered under audit. While formulating

comments on BC of the audit report to the board, what evidences
one need to go through and under what sub paragraphs we can offer
our submissions to the Board . What processes one need to follow in
finalising this comment.