Costing Final

7/25/2019 Costing Final

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CERTIFICATE

This is to certify that the project report titled COST AUDIT has

been copleted satisfactorily in partial f!lfillent of "#CO" $ART I

co!rse of the Uni%ersity of "!bai& for the acadeic year '()*+'(), by

$A-A. "E/0RA1 20A/TA3I a st!dent of S#S#T Colle4e of Arts and

Coerce& Ulhasna4ar 5 6(( ((6#

---------------------------------

---------------------------------Signature of External Guide

Signature of Internal Guide

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ACKNOWLEDGEMENT

The most pleasant part of any project is to express Thankfulness and Give Honor

towards all those who contriuted to the smooth flow of the project work and this eing

the good opportunity! " don#t want to miss it$

%incere thanks to the institution of %$%$T$ &'(()G) which endow me with the

valuale opportunity so interesting and critical topic is the suject of the present report$

" thank my project guide *VINOD ISRANI+ %ir for his valuale inputs in the,esearch and spending so much of their valuale time and efforts in helping with my

topic$

" also wish to express gratitude to the respondents of the project without the kind

co-operation of whom this one would not have een possile$

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Table of Contents

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%r 0o Particulars Page

0umers

1 &oncept of &ost-udit 12 Types of &ost-udit 2

. dvantages of &ost-udit

/ 3unctions of &ost-uditor 14

5 &ost udit under the &ompanies ct 16

6 )xemption in cost audit 17

7 %teps in &ost udit 1

mendments in &ost udit /.


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Cost Audit

1 Concet of Cost Audit!"

ccording to the "nstitute of &ost and 8anagement ccountants of )ngland9 cost

audit represents the verification of cost accounts and a check on the adherence tocost accounting plan$ &ost audit9 therefore9 comprises:

;a< =erification of the cost accounting records such as the accuracy of the cost

accounts$ &ost reports9 &ost statements9 &ost data and &osting techni>ues9 and

;< )xamination of these records to ensure that they adhere to the cost accounting

principles9 plans9 procedures and ojectives$ "t9 therefore9 means that the costauditors attention and approach should e to see that the cost accounting plan is

in consonance with the ojectives set y the organisation and the system of

accounting is geared towards the attainment of the ojectives$ cost accounting

system designed to exercise control over cost may e different from the one if the

ojective is to fix price$ The cost auditor should examine whether the methods

laid down for ascertaining expenses as direct or indirect are cases in point$ Thecost auditor should also estalish the correctness or otherwise of the figures y

the processes of vouching verification9 reconciliation etc$

The origin of the concept of cost audit could e traced to the %econd ?orld ?ar

period when the practice of assigning cost plus contracts started$ However9

proaly "ndia is the only country in the free world where cost audit is statutorily

prescried$ &ost audit can offer valuale assistance to the management in its

decision making process since it ensures reliale cost accounting data and

information$ The management will e in a position to know what price is to e

fixed for a product9 whether the wastages are avoidale9 whether to re-organise

purchase or sales or inventory systems to make the work more efficient and so

on$ )xistence of such a system of audit will also e of great use for maintaining

internal control and internal check and can e an advantageous even to the

statutory financial auditor$ &ost audit9 apart from having all the normal

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ingredients of audit namely vouching9 verification etc$ has within its compass

elements of efficiency audit$

2 T#es of Cost Audit!"

&ost audit is asically carried out at the instance of the management for oviousadvantages$ part from this9 different other circumstances also sometimes

occasion audit of cost accounts$ The different types of cost audit that we come

across may e the following:

Cost audit on be$alf of t$e %ana&e%ent!"

The principal oject of this audit is to see that the cost data placed efore the

management are verified and reliale and they are prepared in such detail as will

serve the purpose of the management in taking appropriate decisions$ The

detailed ojectives include:-

;a< )stalishing the accuracy of the costing data9 as for example9 cost of

material used9 allocation of wages into direct and indirect and on different

products9 functions and cost centre#s$

;< )nsuring that the ojectives of cost accounting are eing achieved through

appropriate collection9 segregation9 analysis and compilation of data$

;c< scertaining anormal losses and gains along with the relevant causes9

expressed in financial terms in a manner that the person responsile for

such loss or gain is identified$

;d< @etermination of the unit cost of production in a precise ut practicale

manner$

;e< )stalishing proper overhead rates for asorption of overheads y various

units of costs so that the cost is properly ascertained and there is no

significant over or under recovery of expenses$

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;f< 3ixation of contract price and the determination of the additional or

supplementary charge that can e raised against customers for alterations9

etc$

;g< "mproving the >uality of cost accounting system y otaining the audit

oservations and suggestions of cost auditor$

Cost audit on be$alf of a custo%e'!"

"n case of cost plus contracts9 often the uyer or the contractee insists on a cost

audit to satisfy himself aout the correct ascertainment of cost$ 8ore often than

not9 the provision9 for a cost audit in such a circumstance is put in the relevant

contract with the stipulation that the supplier or the contractor will extend all co-

operation to the cost auditor$ The cost of production arrived at for this purpose

may differ from the cost of production ascertained for internal purposes$

Cost audit on be$alf of Go(e'n%ent!"

%ometimes9 government is approached with re>uests for susidies9 protection9

etc$ Aefore taking a decision the government may prefer to have the cost of

production of the product determined on the asis of cost audit to satisfy itself

whether the need is genuine or the industry seeking assistance is generally

efficiently run$ The government9 of its own also may initiate cost audit9 in pulic

interest to estalish the fair price of any product$

Cost audit b# t'ade association!"

?here activities of a trade association include maintenance of a price of the

products manufactured y the memer units or where there is pooling or

contriution arrangements9 the trade association may re>uire the accuracy of

costing information sumitted y the memer-units checked$ The trade

association may seek full information on the costing system$ level of efficiency9

utilisation of capacity9 etc$

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Statuto'# cost audit !"

This is covered y the provisions of %ection 2.. of the &ompanies ct$

)* Ad(anta&es of Cost Audit!"

&ost audit will prove to e useful to the management9 society9 shareholders and

the government$ The advantages are as under:

To Mana&e%ent!"

;i< 8anagement will get reliale data for its day-to-day operations like pricefixing9 control9 decision-making9 etc$

;ii< close and continuous check on all wastages will e kept through a proper

system of reporting to management$

;iii< "nefficiencies in the working of the company will e rought to light to

facilitate corrective action$

;iv< 8anagement y exception ecomes possile through allocation of

responsiilities to individual managers$

;v< The system of udgetary control and standard costing will e greatly

facilitated$

;vi< reliale check on the valuation of closing stock and work-in-progress

can e estalished$

;vii< "t helps in the detection of errors and fraud$

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To Societ#!"

;i< &ost audit is often introduced for the purpose of fixation of prices$ The

prices so fixed are ased on the correct costing data and so the consumers

are saved from exploitation$

;ii< %ince price increase y some industries is not allowed without proper

justification as to increase in cost of production9 inflation through price

hikes can e controlled and consumers can maintain their standard of

living$

To S$a'e$olde'!"

&ost audit ensures that proper records are kept as to purchases and utilisation of

materials and expenses incurred on wages9 etc$ "t also makes sure that the

valuation of closing stocks and work- in-progress is on a fair asis$ Thus the

shareholders are assured of a fair return on their investment$

To Go(e'n%ent!"

;i< ?here the Government enters into a cost-plus contract9 cost audit helps

government to fix the price of the contract at a reasonale level$

;ii< &ost audit helps in the fixation of ceiling prices of essential commodities

and thus undue profiteering is checked$

;iii< &ost audit enales the government to focus its attention on inefficient

units$

;iv< &ost audit enales the government to decide in favour of giving protection

to certain industries$

;v< &ost audit facilitates settlement of trade disputes rought to the

government$

;vi< &ost audit and conse>uent management action can create a healthy

competition among the various units in an industry$ This imposes an

automatic check on inflation$

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+* ,unctions of Cost Audito'!"

The "nstitute of &ost and ?orks ccountants of "ndia has detailed the principal

functions of a cost auditor y way of comparison with the functions of the auditor

of financial accounts$ The principal functions of cost auditor9 according to the

aforesaid "nstitute are the following:

-i. In(ento'#

;a< "s the siCe of the inventory ade>uate or excess compared with the

production programmeD

;< "s the provision most economicalD

;c< @oes it ensure optimum order siCeD

;d< @oes it take into account the storage cost on the one hand9 and carrying

cost on the otherD

;e< @oes it take note of lead time of the various items or groups of itemsD

;f< @oes the receipt and issue system cause any ottle-neck in productionD

;g< @oes it involve too many forms and too much paper workD

;h< "s there any room for reduction of inventory cost consistent with

production needsD

;i< "s the inventory as per the priced store ledger and as certified y the

management physically correctD

;j< "s the same amount of attention and care given to monies translated into

material things like raw materials9 stores and supplies of all kinds as given

to li>uid cashD

;k< @oes the issue of raw materials make the production in accordance with

the standard or schedule or otherwise or covered y authorised scheduleD

;i< "s the expenditure of consumale stores within the standardD "f not9 why

notD

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-ii. Oenin& and Closin& Stoc/s " T$e cost audito' 0ill see t$e follo0in&!

;a< That the opening stock is not unduly large compared with the volume of

production during the year!

;< That the opening stock against various jos really represents the actual

physical stock in the production shop and is not merely an accounting

figure!

;c< That the responsiility of the shop foreman in-charge of the stock held in

the production shop is clear and properly documented! that he maintains

proper record of actual consumption vis-a-vis the actual withdrawal from

the stock$

=aluation and correct indication of closing stock in the Trading and Profit and

(oss ccount and in Aalance %heet is e>ually important$ The &ost uditor will

examine and certify:

;a< That the physical verification is correctly carried out!

;< That the valuation is correct with reference to the actual cost of productionand recognised policy for valuation!

;c< That volume of closing stock is commensurate with the volume of

production and that it does not reflect any failure or ottleneck in sales

udget or production udget!

;d< That the volume of unmoved stores is not anormal in comparison with the

normal rate of yearly consumption$ The &ost uditor will recommend

disposal of such unmoved stores with conse>uent release of capital

unnecessarily locked up to the advantage of the financial resources of the

concern$

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-iii. Sto'e Issue 'ocedu'e in Stoc/s" T$e Cost Audito' 0ill see!

;a< That withdrawal of materials or stores to production shop is scientific or

covered y authorised schedule and permits receipt to e located!

;< That there is no possiility of loss or pilferage of stock lying in the

production section!

;c< That surplus materials and scraps arising in production shops are returned

to stores correctly and without delay for which necessary credit is given to

unit cost of production$ "f transferred to other jos9 proper transfer voucher

has een prepared and copies sent to the accounts9 stores9 etc$

-i(. Wo'/"in 'o&'ess " T$e Cost Audito' 0ill see t$e follo0in&!"

;a< That work-in-progress has een physically verified and that it agrees with

the alance in the incomplete cost card!

;< That valuation of the work-in-progress is correct with reference to stage of

completion of each jo or process and the value jo cost cards or process

cost sheet!

;c< That there is no over-valuation or under-valuation of opening work-in-

progress or closing work-in-progress9 therey artificially pushing up and

down net profits or net assets as the case may e!

;d< That the volume and value of work-in-progress is not disproportionate

compared with the finished out-turn$

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-(. Labou'!"

;a< Proper utilisation of laour and increase in productivity are now receiving

attention9 several productivity teams have emphasised importance ofhigher productivity$ "t is9 therefore9 essential to assess the performance

efficiency of laour and compare it with standard performance9 so that

laour utilisation could e progressively improved$ The laour force in

"ndian industries is generally very high compared to similar types of

industries in other developed countries$ 'ur aim should e to reach that

level9 though not immediately ut over some time$ study of this nature

would give an idea where the inefficiency lies so that timely and ade>uate

steps could e taken to ensure maximum utilisation of laour to reduce

laour cost$

;< &ost of laour is allocated to different jos with reference to time or jo

cards$

-(i. Caacit# 2tilisation!"

The cost auditor will see:

;a< that the idle capacity in any production shop or of transport facilities for

distriution is not excessive!

;< that production volume and overall machine time utilised are

commensurate$ "n other words9 the machine hours utilised have given the

optimum output$

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-(ii. O(e'$eads and indi'ect e3enditu'e!"

The cost auditor will see and certify:

;a< That allocation of indirect expenditure over production9 sales9 and

distriution is logical and correct!

;< That compared with the value of production in a production shop9

overhead charges are not excessive!

;c< That actual indirect expenditure does not exceed udgets or standard

expenditure significantly and that any variations are satisfactorily

explained and accounted for!

;d< That the relation of indirect expenditure in keeping with the load on

individual production shop is appropriate!

;e< &orrectness of appropriate allocation of overhead expenditure ;oth

production and sales< will e certified y the cost auditor!

;f< That allocation of overheads etween finished products and unfinished

products is in accordance with correct principles$

Presently we shall discuss in detail the aspects to e dealt with in the cost

auditor#s report pursuant to the &ost udit ;,eport< ,ules9 1B6 as amended in

1BB6 and again in 2441$ These rules came into force from 'ctoer 19 2442$ The

aforesaid ,ules have een issued pursuant to %ection 2..-A ;/< of the &ompanies

ct which re>uires the cost auditor to make a report on the cost accounts and cost

records maintained y the company$

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"t may e noted that the re>uirement of the statutory cost audit in our &ompanies

ct is something special9 ecause statutes in most of the other countries do not

contain a similar re>uirement$ "n most of the countries the concept of cost audit

as such is also non-existent and the ojectives9 whatever they may e9 are

achieved y properly designing the scope and depth of internal audit$

The oject with which the statutory re>uirement of cost audit has een included

in the &ompanies ct can only e ascertained y a study of the cost audit report

re>uirements$ They include control over cost9 wastage and losses9 efficiency in

the utilisation of human9 material9 and other resources9 determination of

appropriate selling price9 proper maintenance of cost records appropriate use of

the costing system9 etc$

3or determining the scope and extent of cost audit9 the cost auditor will

necessarily have regard to the relevant costing records re>uired to e maintained

pursuant to %ection 24B;luirements laid down under

the &ost udit ;,eport< ,ules$

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4* Cost Audit unde' t$e Co%anies Act!"

?e have y now known in general the re>uirements of the various &ost udit

,ecord ,ules issued under %ection 24B ;1


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cost as may e prescried9 if such class of companies is re>uired y the

&entral Government to include such particulars in the ooks of account:

Provided that all or any of the ooks of account aforesaid may e kept at such

other place in "ndia as the Aoard of directors may decide and when the Aoard ofdirectors so decides9 the company shall9 within seven days of the decision9 file

with the ,egistrar a notice in writing giving the full address of that other place$

uired to e furnished along

with application for exemption:

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;i< Printed or attested true copy of complete nnual ,eport containing alance

sheet and profit and loss account for the year for which exemption is eing

sought along with copies of the same pertaining to preceding two years$

;ii< n affidavit containing full facts of capacity utiliCation9 turnover andfinancial status of the company such as sick or not9 duly signed y two

@irectors of the company and authenticated y a 0otary Pulic$

;iii< rief notestatus report on steps taken y the management for revival of

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1.$ 8ethod of accounting of depreciation$

1/$ greement with collaorators or others for payment of royalty9 its

computation and payment$

15$ Treatment of research and development expenses$

16$ ccounting for sales and purchase - treatment with regard to sales tax9excise duty9 etc$

17$ %ystem of year-end stock-taking$

1$ 8ethod of determination of work in progress$

1B$ "nventory valuation policy and method$

24$ %ystem of udgetary control$

21$ %ystem of internal audit$

22$ %tate of internal control over cost accounts and cost accounting records$

2.$ &ost accounting manual9 if any$

2/$ %pecial cost accounting practice and methods peculiar to the industry

under audit$

The cost auditor should familiariCe himself with the memorandum and articles of

association9 past audit reports on the financial accounts9 annual reports issued y

the Aoard9 the &hairman#s speech9 etc$ He should also thoroughly review the

costing system in vogue in relation to the production process and method9 and

should have a detailed knowledge of the flow of the production process and the

documents that arise or are received in that course$ list of the costing ooks of

account maintained y client should also e otained y the cost auditor so that

he knows the purpose and contents of such ooks$

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detailed audit programme should thereafter e prepared so that the work to e

done and the manner in which it is to e done are planned$ %tudents already know

the purpose9 contents and utility of an audit programme in the context of audit of

financial accounts$ ll these are e>ually applicale in case of cost audit$ lso9 thecost auditor should do recording of all relevant information aout the client9 his

usiness9 production process9 unresolved >ueries and matters re>uiring follow-up

or discussion in a properly organised audit note ook and working papers$ Here

again the functions and utilities are the same as in the case of financial audit and

note ooks and working papers can e maintained in the very same manner as in

the case of financial audit$

"t may e noted that as per the &ost udit ;,eport< ,ules9 1BB69 the cost auditor

has to send the audit report within 14 days from the end of the company#s

financial year$ Thus9 a cost auditor now gets aout B4 days to perform the work in

an effective manner instead of .4 days as per the &ost udit ;,eport< ,ules9

1B6$ Therefore9 it is expected that the cost auditor would have sufficient time to

do justice to his work$ "n any case9 he has necessarily to resort to test checkingfor otaining the necessary audit satisfaction$ "t is definitely desirale that the

cost auditor should plan his test checking on the asis of strict rules of statistical

sampling so that he knows how much risk he takes in adopting test checks and

how reliale would e the opinion that he will express$ He should also carefully

study and evaluate internal controls and their operation on the costing ooks and

records efore deciding in favour of test of cost audit and may defer the

appointment of the cost auditor as much as it can and therey reduce further the

time availale to him$ "t is also interesting to note that no specific period of office

has een specified for the cost auditor and9 therefore9 it seems logical to interpret

that the cost auditor holds his office from the time he is appointed till the date of

sumission of his report and the powers under %ection 227 ;1< of the &ompanies

ct can e exercised only during the aforesaid period$ He is not entitled to

receive any notice etc$9 of the annual general meeting or to attend it$ "t seems also

possile that removal of a cost auditor efore he has finished his term y

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completion of his work would e simple for any management ecause the law

has not prescried any procedure therefore$

Ve'ification of cost state%ents and ot$e' data !"

The examination of the cost statements and other records y the cost auditor will

generally cover the following:

;i< (icensed capacity9 installed and utilised capacities!

;ii< 3inancial ratios!

;iii< Production data!

;iv< &ost of raw materials consumed!

;v< &ost of power and fuel!

;vi< )mployee costs!

;vii< &ost of stores etc$ consumed!

;viii< Provision for depreciation!

;ix< 'verheads and their allocation!

;x< ,oyalty and technical aid payments!

;xi< %ales relationships9 local I export!

;xii< normal9 non-recurring and special cost!

;xiii< &ost statements!

;xiv< ,econciliation with financial ooks$

Necessit# to 'efe' to financial 'eco'ds!"

"t is needless to mention that the cost audit programme should cover all the aove

and any other matter that the cost auditor considers necessary$ "t is also ovious

that cost audit under the &ompanies ct cannot e performed without reference

to financial ooks and records$ This is simply for the reason that a apart from the

re>uirement to have reconciliation etween cost and financial accounts done$ The

cost statements are to contain a summary of all expenditure incurred y the

company and the share in such expenditure attriutale to the activities covered

y &ost ccounting ,ecords ,ules! overhead expenditure also needs allocation

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etween activities covered y the rules and activities not so covered$ 0aturally9

this can e done only e reference to the financial ledger$ )xpenses like salaries

and wages may not e fully reflected in the cost statements and to ascertain

whether appropriate charge has een made in the cost records9 there would

invarialy e a necessity to refer to the full charge for salaries and wages in thefinancial ledger$ Ender the re>uirement of Part "" of %chedule =ito the

&ompanies ct9 >uite a few matters are there which could e of direct relevance

to the cost auditor - for example9 consumption of raw materials in >uantity and

value9 sales of finished goods under classified headings in >uantity and value9

licensed and installed capacities9 actual production in >uantities9 inventory in

>uality and value in respect of each class of goods produced andor dealt with y

the company$

?e can see from the aove discussion that there exists >uite a siCeale

overlapping etween the financial accounting records and cost accounting

records$ )ffectiveness of oth the audits9 and specially cost audit9 can e

enhanced sustantially of if appropriate availale data9 and documents pertaining

to the other field are kept in view while making audit verification$ "t may

especially help the audit ;cost and financial oth< to locate errors9 mistakes and

omissions present in either set of accounts$ "f the cost auditor takes the pain of

correlating the consumption of raw materials as appearing in the cost records

with consumption disclosed in the financial records9 he may e ale to locate

sustantial errors either in cost records or in financial records$ t least a material

discrepancy etween the two sets of consumption data will put him on special

en>uiry aout the correctness of costing data and in these process errors in either

may e estalished$ Then comes the >uestion: suppose he is convinced of the

presence of a mistake in financial accounts after satisfying himself aout the

correctness of costing records9 what he should doD He has no apparent duty to

inform the auditor of financial accounts aout the detection of the mistake$ Aut

nothing forids him from asking the company to rectify the relevant coststatement where the complete financial data is compiled and allocated etween

activities covered y the &ost ccounting ,ecords ,ules and other activities$Page | 22


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lso9 the reconciliation statement etween costing and financial data will

invarialy contain indication of the discrepancy$ lso he may ring the

discrepancy to the notice of the management in writing and a copy of such

communication may e endorsed to the financial auditor$ "n fact9 no definite

course of conduct has emerged as yet ut it can e emphasised that the possiilityof existence of mistakes in either record eing located y the other auditor

proaly will lead to the development of necessary rapport etween the two

auditors$ "t may e pertinent to note that oth the auditors have access to the

records in the other field under the authority of law and it is the duty of the each

auditor to refer to them to otain necessary audit evidence that may help him in

the discharge of duties cast on him$ The auditor of financial accounts examines

various allocations of overheads etc$ to ascertain whether financial data is at

variance with costing data$ This he should provide in his audit programme itself$

However9 it is doutful whether the cost auditor#s report will e made availale

to the financial auditor even though in great many cases cost audit would e over

efore financial audit$

Reo'tin& !"

fter completion of audit of costing and other relevant records the cost auditor is

to sumit his report in terms of %ection 2..A;/< of the &ompanies ct to the

&entral Government$ copy of the report has to e sent to the company at the

same time$ 3urther9 as per the &ost udit ;,eport< mendment ,ules9 1BB69 the

cost auditor shall also reply to any clarification sought y the &ompany (aw

Aoard on the &ost udit ,eport sumitted y him9 within .4 days$ The form and

contents of the cost auditor#s report has een specified in the &ost udit ;,eportuirements9 examination of contracts and

agreements9 review of the Aoard#s and shareholders# minute ooks to trace

important decisions having earing on costs9 verification of title deeds and

documents relating to properties and assets9 etc$ &ost audit9 in order to e

effective9 should e completed at one time as far as practicale$ The exact content

of cost audit largely depends on the siCe of the organisation9 range of products9

production process9 the existence of a well organised costing department and of a

well designed costing system9 and the existence of a capale internal auditing

system$ 'ther relevant considerations may e:

;a< %ystem of cost accounting in vogue and the organisation of the cost

department9 forms9 schedules9 etc$

;< %ystem of internal check used in the organisation$

;c< 3re>uency of audits9 areas to e covered9 volume of transactions9

efficiency of the internal check9 needs of management9 purpose of cost

audit9 its enefits9 etc$

fter considering the aforesaid factors a set of procedures and instructions are

evolved which may e termed the cost audit programme$ (ike every other audit9

a systematic planning of cost audit routine is necessary$ Aroadly speaking cost

audit programme may e divided into the following stages:

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-a. Re(ie0 of Cost Accountin& Reco'ds " T$is 0ill include!"

;i< 8ethod of costing in use - atch9 process or unit$

;ii< 8ethod of accounting for raw materials! stores and spares9 wastages9

spoilage defectives9 etc$

;iii< %ystem of recording wages9 salaries9 overtime and spares9 wastages9 etc$

;iv< Aasis of allocation of overheads to cost centres and of asorption y

products and apportionment of service department#s expenses$

;v< Treatment of interest9 recording of royalties9 research and development

expenses9 etc$

;vi< 8ethod of accounting of depreciation$

;vii< 8ethod of stock-taking and its valuation including inventory policies$

;viii< %ystem of udgetary control$

;ix< %ystem of internal auditing$

-b. Ve'ification of cost state%ents and ot$e' data " T$is 0ill include t$e

(e'ification of!

;i< (icensed9 installed and utilised capacities$

;ii< 3inancial ratios$

;iii< Production data$

;iv< &ost of raw material consumed9 wages and salaries9 stores9 power and fuel9

overheads provision for depreciation etc$

;v< %ales realisation$

;vi< normal non-recurring and special costs$

;vii< &ost statements$

;viii< ,econciliation with financial ooks$

part from the aforesaid types of cost audit9 the undernoted circumstances may warrant

the introduction of cost audit:

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;a< 'ice fi3ation!" The need for fixation of retention prices in the case of materials

of national importance9 like steel9 cement etc$ may e useful in knowing the true

cost of production$

;< Cost (a'iation 0it$in t$e indust'#!" ?here the cost of production variessignificantly from unit to unit in the same industry9 cost audit may e necessary

to find the reasons for such differences$

;c< Inefficient %ana&e%ent!" ?here a factory is run inefficiently and

uneconomically9 institution of cost audit may e necessary$ "t may e particularly

useful for the Government efore it takes over any unit$

;d< Ta3"assess%ent!" ?here a duty or tax is levied on products ased on cost of

production9 the levying authorities may ask for cost audit to determine the correct

cost of production$

;e< T'ade disutes!" &ost audit may e useful in settling trade disputes aout claim

for higher wages9 onus9 etc$

19* Ri&$ts and Duties of Cost Audito'!"

The cost auditor enjoys the powers and has the duties as contained in %ection

227;l< of the &ompanies ct9 1B56 Fvide %ection 2..A ;/< of the &ompanies ct9

1B56J$ "t may e oserved that %ection 227;1< does not contain any thing which

may e considered a duty$ "t really contains the rights and powers that are

allowed to an auditor$ &onse>uently reference to the word duty in %ection

2..A;/< is superfluous and redundant$ (ike the auditor of financial accounts9 the

cost auditor also has the right of access at all times to the ooks and vouchers9 of

the company ;not necessarily related to cost records or cost accounts and he is

entitled to re>uire from the officers of the company such information andexplanations as he may consider necessary in his duties as the cost auditor$ %u-

section ;6< of %ection 2.. makes it a duty of the company to give all facilitiesPage | 26


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and assistance to the cost auditor$ "t has also een provided in ,ule 5 of the &ost

udit ;,eport< ,ules that the company and every officer thereof9 including

persons referred to in %ection 24B;6< of the &ompanies ct9 1B569 shall make

availale to the cost auditor within 1.5 days from the end of the financial year of

the company such cost accounting records9 cost statements and other ooks andpapers that would e re>uired for conducting the cost audit$ Ender the aforesaid

,ule9 the company and its officers mentioned aout are re>uired to render

necessary assistance to the cost auditor so as to enale him to complete the cost

audit and sent his report within 14 days from the end of the company#s financial

year to which the cost audit report relates$ The cost auditor#s duty as contained in

%ection 2..A;/< is to make a report to the &entral Government in the form

prescried under the &ost udit ;,eport< ,ules$ 3urther9 as per the &ost udit

;,eport< mendment ,ules9 24419 the cost auditor shall also reply to any

clarification sought y the &ompany (aw Aoard on the &ost udit ,eport

sumitted y him within .4 days$

The reports that the cost auditor is re>uired to make under the aforesaid ,ules

indicates the nature of duty he is to perform$ "t may e noticed that similar to the

audit or of financial accounts9 how the cost auditor is to perform his duty9 what

procedures and techni>ues are to e applied and how he is to plan his work9 have

een left to his judgement$ However9 it is clear that he is to carry out an

examination of the costing ooks of account and other relevant records$ "n the

process9 he is to otain information and explanations which he considers

necessary for a proper examination$ He will have to assess at various stages of

the examination what information and explanations are necessary$ This is a

matter where skill and experience of the cost auditor will e an indispensale aid$

The power to otain information and explanations is a tool to accomplish the

duty cast on him$ He should know how to use this tool$ He should also make

systematic record of the information and explanations sought in the audit note

ook and keep oservations aout whether they have een otained9 and9 ifotained9 whether they sufficiently resolve the >ueries in his mind$ "f a cost audit

is performed without seeking information and explanations or evaluation of thePage | 27


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information and explanation otained9 it may e construed that an essential part

of the duty has not een performed9 specially when it is estalished that

circumstances were such that should have evoked >ueries$ "t may e oserved

that the re>uirements to report aout otaining of information and explanations is

similar to the one meant for the financial auditor$ The cost auditor has also tostate in his report whether proper cost accounting records as re>uired under

%ection 22B;l< ;< have een kept y the company and whether the said ooks

and records give the information re>uired y the &ompanies ct9 1B56 in the

manner re>uired$ To deal with this matter9 the auditor has to satisfy himself that

when cost accounting records are re>uired to e maintained9 pursuant to the &ost

ccounting ;,ecord< ,ules applicale to the client company9 these have een

properly maintained$ 8erely having the record will not meet with the intention of

the law$ The auditor has to further satisfy himself that the information and data

collected and compiled therein are correct and the cost of production determined

therefrom is fair$ "f the cost auditor finds departures from the prescried form and

manner9 he should look into the reasons for the departure and satisfy himself that

it is not material and is in accordance with the circumstances of the company$ 3or

example9 if a company producing infant milk food does not have the system of

payment to workers on the piece rate asis9 the cost records for salaries and

wages will not show any such payment although the relevant rules re>uire a

separate disclosure of payments ased on piece rate$ However9 if the departure is

one that can not e justified9 the conclusion should e that the records have not

een kept in the manner re>uired y the relevant ,ules and therefore not in

conformity with the re>uirement of the &ompanies ct9 1B56$ "t may e noted

that the cost auditor is concerned with the maintenance of cost records as

prescried under %ection 24B;1uired y law+

which is a far wider canvas and includes cost records also$

The cost auditor has also to state whether proper returns ade>uate for the purpose

of cost audit have een received from ranches not visited y him$ "t may ePage | 2


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oserved that unlike the financial audit there is rio provision for separate cost

audit of cost records maintained at the ranch$ "t may also e appreciated that a

ranch not physically carrying out any manufacturing operation9 nevertheless

may incur expenses that figure in the various cost statements and cost records

prescried$ The cost auditor as such is responsile not only for the recordsmaintained at the head office or the place where manufacturing operations take

place9 ut also for the records that concern a cost audit9 maintained at the ranch$

3or enaling the cost auditor to have a total view of the costing records the

ranch is impliedly re>uired to send proper returns to the head office for

incorporation in the main costing records$ "t is necessary that the ranch returns9

to the extent they concern cost accounts of the product covered y the applicale

,ules9 should contain all the information that is re>uired under the rules9 as far as

it is applicale to the operations of the ranch$ The form of the returns should

also e such as to facilitate proper incorporation of the data and information in

the main cost records$ 'therwise the returns may not e considered as proper

returns$ %imilarly9 ade>uate evidence should e availale alongwith the returns to

support figures contained in the returns$ visit y the cost auditor to the ranch

to ascertain the true state of cost records is not precluded$

Eltimately9 the cost auditor is to state whether in his opinion the company#s cost

accounting records have een properly kept so as to give a true and lair view of

the cost of production9 processing etc$9 as the case may e9 and marketing of the

product$ Aasically whether the cost of production ascertained is true and fair or

not is dependent upon whether cost accounting records have een properly kept$

"t has een oserved earlier that even a mechanical maintenance of cost

accounting records9 if they are in accordance with the cost records prescried9

may9 in terms of the letter of law9 lead to an expression of affirmative opinion$

The >uestion that should e resolved is: what is the ojective of the whole

exercise involved in cost auditD "f the ojective is determination of the true cost

of production9 then mere adherence with the &ost ,ecords ,ules is not enough$Ay scrupulously following the ,ules one may arrive at a certain cost of

production figure which may not necessarily represent a true and fair figure$ AutPage | 2B


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it seems9 this is not the intention of law$ That is why in another part of the &ost

udit ;,eport< ,ules9 there is a re>uirement to comment on the costing system

followed$

T'ue and fai' cost of 'oduction etc !

The true and fair concept is known to us in the context of financial accounts$

Aased on that knowledge9 it may e assumed that the following are the relevant

considerations in determining whether the cost of production determined is true

and fair:-

1$ @etermination of cost following the generally accepted cost accountingprinciples$

2$ pplication of the costing system appropriate to the product$

.$ 8ateriality$

/$ &onsistency in the application of costing system and cost accounting

principles$

5$ 8aintenance of cost records and preparation of cost statements in theprescried form and having the prescried contents$

6$ )limination of material prior-period adjustments$

7$ normal wastes and losses and other unusual transactions eing ignored

in determination of cost$

The report of the cost auditor discussed aove will e suject to the cost auditor#s

oservations and conclusions9 if any9 made pursuant to clause 16 of the nnexure

to the &ost udit ,eport ,ules$ lso the report is suject to oservations of the

cost auditor on the various matters contained in the nnexure$

Anne3u'e to Cost Audit Reo't ?As e' Cost Audit -Reo't. Rules@!"

Ender the &ost udit ;,eport< ,ules an nnexure has een provided to e tilled

y the cost auditor and annexed to the report that he makes$ The matters

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contained in the nnexure form part of the cost auditor#s report$ The annexure to

the &ost udit ;,eport< ,ules as further amended y the &ost udit ;,eportualification and designation of the officer heading the cost

accounting section or department of the company$

;1.< "n case of loan licensejo work arrangement y the company9 mention the

name of the third party and location of the factory9 where the product has

een produced manufactured$

;1/< "f there is any foreign technical collaoration for the product under

reference9 the following details shall e given:

;a< 0ame and address of the foreign collaorators!

;< 8ain terms of agreement!

;c< mount of royalty9 lump sum payment9 technical aid fee payale

and the asis of calculating the same!

;d< ?hether the technical collaorator has contriuted to the share

capital$ "f so9 the paid up share capital so held$

;15< "f the company is engaged in other activities esides the manufacture of

the product under reference9 the following details in respect of each such

product or activity shall e given:

;a< (ist of the products or activities!

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;< (ist of the products or activities for which &ost ccounting ,ecords

,ules have een prescried under section 24B;1


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8* Cost Accountin& S#ste%!"

;1< Ariefly descrie the cost accounting system existing in the company9

keeping in view the e>uirements of the &ost ccounting ,ecords ,ules

applicale to the class of companies manufacturing the product under

reference and also its ade>uacy or otherwise to determine correctly the cost

of production9 cost of sales9 sales realisation and margin of the product

under reference$

;2< Ariefly specify the changes9 if any9 made in the costing system! asis of

inventory valuation! method of overhead allocation! apportionment to cost

centersdepartments and final asorption to the product under referenceetc$9 during the current financial year as compared to the previous financial

year$

.$ 'ocess Of Manufactu'e !"

rief note regarding the process of manufacture along with flow chartcovering production9 utility and service department of the product$

/$ uantitati(e Details !"

s per this report the cost auditor is re>uired to give >uantitative

information for the current year and two immediately preceding previous

years$ This >uantitative information includes9 total availale capacity ;i$e$

installed capacity K capacity enhanced during the yearuired

to give information aout opening stock of finished good9 >uantity produce

during the year9 >uantity sold and closing stock of finished goods$

5$ MaBo' Inut Mate'ialsI Co%onent Consu%ed !"

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Ender this heading9 the cost auditor is re>uired to give details of >uantity9

rate and amount for current year and two previous years9 in respect of

major input materials each of which constitute at least 2L of total raw

material cost$ These details are to e given separately for indigenous9 self-

manufactured and imported input materials$ The cost auditor also re>uiredto give detail of standard and actual consumption of input material per

unit$

6$ 6'ea/"u of cost of inut %ate'ials i%o'ted du'in& t$e #ea'!"

Ender this heading the cost auditor is re>uired to give following details in

respect of all major imported input materials each of which constitute at

least 2L of the total material cost$ ;a< 3'A price in foreign currency9 ;uired to give information aout research and

development expenses for9 process development9 existing product

development and new product development$ The auditor also re>uired to

state amount capitaliCeddeferred and amount provided in the cost record$

This information is to e given for current year as well or for two previous

years$

1/$ Ro#alt# and Tec$nical Kno0" $o0 C$a'&es !"

The auditor is re>uired to give information aout9 royalty onproductionsales9 lumpsum payment of royalty and technical knowhow

charges$ The auditor also re>uired to state amount capitaliCeddeferred and

amount provided in the cost record$ This information is to e given for

current year as well as for two previous years$

15$ ualit# Cont'ol E3enses !"

Ender this heading the auditor is re>uired to give information aout9 "%'

numer of company if any$ name of certifying agency$ salaries and wages

and other direct expenses relating to >uality control$

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16$ ollution Cont'ol E3enses !"

Ender this heading the auditor gives information aout expenses of

company for pollution control on account of effluent treatment9 control of

air pollution9 control of ash pound and penalty for pollution under any ct$

These information9 are to e given for current year as well as two previous

year$

17$ Abno'%al Non 'ecu''in& cost !"

The auditor is re>uired to give details of anormal nonrecurring cost for

the current year and two previous years for the product under reference and

for factory as a whole$

1$ Non"%o(in& stoc/ !"

Ender this heading the auditor is re>uired to give information aout value

of non-moving direct material9 indirect material9 work in progress and

finished goods$ The value of this non-moving item is also to e expressed

in percentage form as compared to closing stock of that item$

1A$ W'itten off stoc/ !"

The auditor is re>uired to give data of written off stock for the current year

and two previous year9 for the product under reference and for factory as a

whole$

1B$ In(ento'# Valuation !"

The cost auditor is re>uired to report on the asis of valuation as adopted

for the valuation of9 input materials9 chemicals9 additives and consumales9

stores and spares9 packing materials9 work-in progress$ finished goods and

scrapwastage$ The auditor also re>uired to state9 total value of inventory

as per cost accounts and financial accounts and reason for major

difference9 if any etween these two values$

1BA$ $#sical Ve'ification of In(ento'# !"

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The cost auditor is re>uired to indicate is there any shortage or excess

value of inventory which is discovered during physical verification of

inventory$ This information are to e given separately for raw materials9

chemicals9 additives9 consumale9 stores and spares9 packing materials9

tools and implements9 ?$"$P and finished goods respectively$

24$ Sales of t$e 'oduct unde' 'efe'ence !"

The cost auditor is re>uired to report on the >uantity9 rate and amount of

sales of major product$ These details are to e given separately for

purchase goods9 loan license asis and own manufactured goods$ These

information are to e given for current year as well as previous year$

21$ Ma'&in e' unit of outut!"

The cost auditor is re>uired to report on the cost of sales9 sales realiCation

and margin9 per unit of out put$ These details are to e given separately for

purchase goods9 loan licence asis and own manufactured goods$ These

details are to e furnished for major product group and for current year and

two previous year$ %eparate details shall e furnished for margin on

indigenous sales and export sales$ ?here the product ;such as sugar9 ulk

drugs9 etc$< is sold at different price in accordance with government policy9

sales realiCation and margin on such product at different price shall e

shown separately along with >uantity and value$

22* Co%etiti(e %a'&in a&ainst i%o'ts!"

Ender this heading auditor re>uired to give information aout9 total

production of the product in the country9 total production y the company

and percentage share of the company in total inland production$ The

auditor is also re>uired to give information aout9 cost of production per

unit separately for inland sale and export sale$ These information are to e

given for current year as well as for two previous year$

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2.$ Value addition and Dist'ibution of ea'nin&!"

The auditor is re>uired to give a value add statement9 in which9

information aout gross value added and distriution of such value added

to different segment of company$

2/$ ,inancial osition and 'atio anal#sis!"

uditor is re>uired to give financial position information as well as ratio

analysis$ These information are to e given for product9 factory as a whole9

company as a whole for current year and two previous years$ Ender

financial position details auditor is re>uired to give information aout9

capital employed9 networth9 profit and net sales$ 3or ratio analysis auditor

is re>uired to give following ratio$ ;1< 'perating expenses as percentage of

net sales9 ;2< profit as percentage of capital employed9 networth9 net sales

and value addition9 ;.< current ratio9 ;/< net working capital in terms of

months of cost of sales excluding depreciation and ;5< det e>uity ratio$

25$ Caitalisation of 'e(enue e3enditu'e !"

Ender this the auditor is re>uired to give information aout capitaliCation

of revenue expenditure9 these information are to e given for the product

under reference and for factory as a whole$ These information should

contain detail of expenditure for raw materials9 direct wages and salaries9

consumale stores9 repairs and maintenance9 depreciation9 factory

overhead9 administrative overhead and other expenses$

26$ Related a't# t'ansactions !"

The auditor re>uired to riefly descrie the transfer pricing9 followed y

the company in respect of *related party relationship+ as defined in the

relevant cost accounting records rules made under clause ;d< of su-section

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;1< of section 24B of the ct$ The following particulars for sale and

purchase transaction with related party may e furnished y the auditor ;auantity9 ;d< rate9 and

;e< amount$

27$ Cent'al e3cise 'econciliation fo' t$e 'oduct unde' 'efe'ence !"

uditor is re>uired to give following details for excise reconciliation9

;i< Muantitative detail: uditor is re>uired to give details of opening

stock9 production9 total sales and closing stock of finished goods$

;ii< @etails of clearance: Ender this auditor is re>uired to give details of

assessale value9 rate and amount of duty on total excisale

clearance and total duty payale$

;iii< %ummary of &envat credit: Ender this auditor is re>uired to give

details of opening alance of cenvat credit9 credit availed during the

year9 closing alance of cenvat credit and credit utiliCed during the

year$

;iv< ,econciliation of duty paid: Ender this auditor is re>uired to give

details of total excise duty payale9 excise duty paid through &envat

account and P$($ and any difference$

;v< ,econciliation of duty paid and recovered: Ender this the auditor is

re>uired to give detail of excise duty paid as per Profit and (oss

ccount9 excise duty recovered as per Profit and (oss ccount and

any difference etween duty paid and recovered9 if so state amount

and reason for difference$

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;vi< ,econciliation of turnover: 3or this auditor is re>uired to give

details of turnover as per ,T-129 turnover as per annual accounts

;net off duties and taxes< and any difference etween these two9 if

so9 state amount and reason for difference$

GOVERNMENT O, INDIA

MINISTR O, CORORATE A,,AIRS

NOTI,ICATION

Ne0 Del$i t$e )1stDece%be' 891+

G*S*R* 91-E.* "n exercise of the powers conferred y su-sections ;1< and ;2< of section /6B and

section 1/ of the &ompanies ct9 241. ;1 of 241.


43/46

)*

Petroleum products regulated y the

Petroleum and 0atural Gas ,egulatory Aoard

under the Petroleum and 0atural Gas

,egulatory Aoard ct9 2446 ;1B of 2446 !

274B to 2715!

+* @rugs and pharmaceuticals!2B41 to 2B/2! .441

to.446$

4* 3ertilisers! .142 to .145$5* %ugar and industrial alcohol! 1741! 174.!2247

-6. Non"'e&ulated Secto's

Sl* No* Indust'#7 Secto'7 'oduct7 Se'(iceCETA Feadin&

-0$e'e(e'alicable.

1*

8achinery and mechanical appliances used

in defence9 space and atomic energy

sectors excluding any ancillary item or

items!)xplanation$ N 3or the purposes of

this su-clause9 any company which isengaged in any item or items supplied

exclusively for use under this clause9 shall e

deemed to e covered under these rules

/41 to /42! 41 to 45!

B41 to B4

8* Turo jets and turo propellers! /11

)* rms and ammunitions! .641 to .64.! B.41 to B.46$

+*

Propellant powders! Prepared explosives

;other than propellant powders

fuses! detonating fuses! percussion or

detonating caps! igniters! electric detonators!

.641 to .64.

4*

,adar apparatus9 radio navigational aid

apparatus and radio remote control

apparatus!

526

5

Tanks and other armoured fighting vehicles9

motorised9 whether or not fitted with

weapons and parts of such vehicles9 that are

funded ;investment made in the company< to

the extent of ninety per cent$ or more y the

Government or Government agencies!

714

uired to e maintained under rule . is rupees twenty five crore or more$

;2< )very company specified in item ;A< of rule . 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 theimmediately 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 re>uired to e

maintained under rule . is rupees thirty five crore or more$

;.< The re>uirement for cost audit under these rules shall not apply to a company which is covered in

rule .9 and N

;i< whose revenue from exports9 in foreign exchange9 exceeds seventy five per cent of its total revenue!

or

;ii< which is operating from a special economic Cone$+

;iv< in rule 59 in su-rule ;1uirement under this rule shall apply in respect of each of its financial year

commencing on or after 1st day of pril9 2415$+

;v< in rule 69 after su-rule ;.

Costing Final

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