Cost Audit &
Cost Records

Statutory Cost Audits - Cost Audit & Cost Records

Cost Audit & Cost Records

Cost Audit

We are currently the cost auditors for many of the big corporates in South India. Section 148 of The Companies Act, 2013 read with The Companies (Cost Records & Audit) Rules 2014 and The Cost and Works Accountants Act, 1959 provide the statutory frame of the present Cost Audit Mechanism.

Applicability of Cost Audit (Based on "The Companies (Cost Records & Audit) Rules, 2014)

Table A:

Regulated Sector (Drugs &Pharmaceutical, Sugar & Industrial Alcohol, Fertilizer, Electricity Telecommunication and Petroleum Products).

Table B:

Non-Regulated Sector (Others).

Regulated Sector

If the company is engaged only in any of the activities in Table A, the overall turnover of the company for all products and services should be at least Rs 50 Cr or above in the Previous Year.

If the company is engaged in other products/services in addition to Table A and if such products do not fall under Table A or B, then

  1. a) Overall turnover of the company for all products /services should be at least Rs 50 Cr or above and
  2. b) Aggregate turnover of products/services in Table A& B should be at least Rs 25 Cr

The company falls under Cost Audit if the above conditions are fulfilled.

Exemptions from Cost Audit
  • Companies having export revenue exceeding 75% of the total turnover.
  • Companies operating in SEZs.
  • Companies engaged in generation of electricity for captive consumption.

Non-Regulated Sector (Others).

Every company engaged in production/services in Table A / B having an overall turnover from all its products / services of Rs 35 Cr in the Previous Year shall maintain cost records.

Table B

Machinery used in space, nuclear atomic and defense sector, Turbo Jets & Propellers, Arms & Ammunitions, Explosives & Safety Fuses, Radar and related things,  Tanks and armored vehicles, Port Services, Aeronautical Services, Steel, Roads & Infrastructure sector, Rubber & allied  products,  Coffee & Tea, Railway related sectors, Cement, Ores & Mineral products, Base  Metals, Chemicals, Jute & Jute products, Edible Oil, Construction Industry, Healthcare Sector, Education Services, Milk Powder, Insecticides, Plastics, Tyre & Tubes, Paper, Textiles, Glass, Machinery – Electrical, Electronic and others in general,  Production, import and trading of critical health sector devices like Cardiac stents, Valves, Spinal Implants etc

(The above is a list of suggestive nature, For a detailed verification refer to concerned notification which has tariff-based classification)

Cost Records

Every company engaged in production/services as shown in Table A / B having an overall turnover from all its products / services of Rs 35 Cr in the Previous Year shall maintain cost records. A certification from a Practicing Cost Accountant/Firm in this regard is often insisted by the Statutory Financial Auditors.

The definition of the word ‘cost records’ has been provided under rule 2 (e) of the Companies (Cost Records and Audit) Rules, 2014, CRA-1, which means books of accounts relating to the utilization of materials, labor and other items of cost as applicable to the production of the goods or provision of services as provided in section 148 of the Act and the Companies (Cost Records and Audit) Rules.

Cost Audit – Benefits beyond statutory obligation

Operational audit is a review mainly focusing on the key processes, procedures, system, as well as internal control with an objective to improve the productivity, as well as efficiency and effectiveness of operation.Operational audit is also targeted the leak of key control and processes that cause waste of resources and then recommend for improvement.

Internal Audit provides a number of important services to company management. These include detecting and preventing fraud, testing internal control, and monitoring compliance with company policy and government regulation.

The role of internal audit is to provide independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively.

Internal audit functions consider wider issues such as risks to the organisation’s reputation and culture, cyber security, financial crime and the management of complete supply chain process.

The principal objective of efficiency audit is to ensure that resources flow into the most remunerative channels.

Its purposes are basically two fold, which are as follows:

  • That every rupee invested in capital, or in other fields gives optimum results.
  • That the balancing of investment between different functions and the aspects is designed to give optimum results.

Stock Audits

Advantages to the management

  • It provides reliable and certified cost data for managerial decisions.
  • It provides data to regulate production.
  • It functions as a tool for detection of frauds, errors, and irregularities.
  • Wastages in material & labor utilization can be plugged using this data.
  • Helps to bring in responsibility accounting where irregularities and wastages are there.
  • Provides a platform for constant reviews on costs and overheads.
  • It makes budgetary control more effective since reliable data is there to compare with budgeted figure.
  • Enables comparison in different parameters of different units.
  • It confirms compliance related to the concerned provisions.

Advantages to Shareholders

  • Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and economically.
  • Cost audit ensures a true picture of company’s state of affairs. It reveals whether the resources like plant and machinery are being properly utilized or not.
  • The cost audit enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.

Advantages to the Government

  • Cost audit assists the ‘Tariff Board’ in deciding whether tariff protection should be extended to a particular industry or not.
  • Cost audit helps to ascertain whether any particular industry should be given any subsidy in order to develop that industry (Anti-Dumping Duty).
  • Cost audit provides reliable data to the government for fixing up the setting prices of the various commodities.
  • Cost audit helps the government to take necessary measures to improve the efficiency of sick industrial units.
  • Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
  • Cost audit can reveal the fraudulent intentions of the management.
  • Cost audit facilitates settlement of trade disputes of the companies.

Advantages to the Society

  • Cost audit improves the efficiency of industrial units and thereby assists in economic progress.
  • Since it brings out the true cost of production, selling price can be monitored and controlled by government interventions.
  • It provides a scope for check on prices and as a result purchasing power of the society is balanced.