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:: MANAGEMENT ACCOUNTING PRESENTATIONS ::

PGDBM (BM) 1ST SEM

AN OVERVIEW OF

“C O S T A U D I T ”

GROUP NO. 10

ØS H R I K A N T S A L U N K E .
ØS U N I L S I N G H .
ØT R I B H U VA N R AWA N I . * * *
ØT U S H A R K H E R .
ØV I K A S K r . S I N H A .

compiled by BM batch 2009-11 1


COST AUDIT
Concept :-

As its clear from the name Cost Audit is


the Audit of cost, i.e and costing
methodologies followed by any
production/manufacturing organization.

It is the process of verification of cost


accounts which includes all the aspects
that add to the cost of
production/manufacturing/assembling of
certain kinds of goods.
DEFINITION

According to I . C . W . A. ( Institute of cost and


works accountant of India):

“ Cost audit is an audit of efficiency of minute


details of expenditure while the work in
progress, and not a post mortem examination”.

“Cost Audit is mainly a preventive measure, a


guide for management policy and decision, in
addition to being the barometer of performance.”

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# WHY COST AUDIT ? ?
EXAMPLE :-

Suppose XYZ Pvt. Ltd. Manufactures Air Conditioners.


There is a Govt. Agency which has to buy this product
from XYZ in bulk.
So. in normal situation XYZ here will try that cost it
incurs in making these air conditioners should be
minimum as well as the cost it quotes will be SHOWED as
MORE than the actual cost.

So, here The govt. agency will ask XYZ to quote its
audit cost and selling price for the tender.
This AUDITED COST will be more reliable & authentic.

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Actual Cost - Showed Cost - Profit
Profit Breakup Breakup for same
for 1000 units production .

Actual cost is less than the showed


cost , hence the Firm will manage to
earn more profits and will show
less .
PROFIT
# This will give it more profit but
it will pay lesser taxes .
COST
Here is the case where need for cost
audit arise .

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EVOLUTION
qIn India the evolution of cost audit can be
traced from the era of the World War II . The
government made a lot of purchases in order
to fulfill the requirements of the armed
forces .

qThe govt . was willing to purchase big lots


of goods in low cost .

qThe Suppliers faced problem in quoting


prices as the cost of variable inputs was
fluctuating .

qIn order to resolve this issue the govt .


started entering into a cost - plus contract
with the suppliers .
Contd..
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q

qUnder this , the Govt . verified the cost


incurred and then added up a certain
percentage of total verified cost to get the
amount payable by the government .
q
qAfter Independence Govt . took steps to study
the cost aspects of production and developed a
system of control over the Prices by checking
the authenticity of costs being showed .
q
qThis ensured fair price to consumer and fair
remuneration to manufacturer .

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OBJECTIVES OF COST AUDIT

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LEGAL PROVISIONS FOR COST
AUDIT
Statutory provisions included in :-

Indian Companies Act ( Amendment ) 1965 , sec


209 ( 1 ) ( d ).
{ It deals with provisions related to cost
records .}

Sec . 233B ( Amended in 1988 )


deals with the specific cases where
cost audit is applicable .

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Maintenance of books of account under
( sec . 209 ) ( 1 ) :-
As per the provisions of this section, every company is required to
maintain the following :

(a)All receipts and disbursements of money and matters in respect of which


the receipt and disbursements take place.
(b)All sales and purchases of goods of the company.
(c)The assets and liabilities of the company.
(d)

Section 209 ( 1 )( d ):-


It provides that in case the company is engaged in any of the following
activity i.e.
[a]Mining [b] production [c] processing [d] Manufacturing.

Then the company will have to prepare a detail of labor and material cost
being involved as well as the other elements of cost being involved.

contd…..

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As according to the section 209 ( 1 )( d ) the government has
prescribed rules as regards maintenance of cost accounts
separately , for the following industries ..( 33 industries )

Cement Cycles Polyester


Rubber Tyres and Caustic soda
Cotton textiles

tubes
Room Air Refrigerators Dry battery cell

Automobile Electric lamps Sulfuric Acid


conditioners
Electric fans Electric motors Steel tubes and pipes
batteries
Motor vehicles Tractors Power driven pumps
Aluminum Vanaspati
Diesel engines
Bulk drugs Sugar
Internal combustion
Industrial alcohol Infant milk food
Electrical cables and
Jute goods Paper engines
Soda ash
Rayon Dyes conductors
Nylon

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PERFORMING COST AUDIT
Elements of cost :-
(i) COST OF RAW MATERIAL;

1.The cost of raw materials, both in quantities and


value, as given in the statements, should be
verified.

2.In case the transport cost of raw materials is a


significant element of cost, as in the case of cement
and sugar industry, the transport cost is determined
separately. In case of imported raw materials, the
various elements are: FOB value , ocean freight ,
insurance , custom duty , clearing / forwarding
and inland freight.
3.Data for raw materials consumption have to be
provided for the year under audit, as well as for the
previous two years, compiled
for comparison .
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(ii) Material Consumption
1. Material consumption is worked out by deducting
closing inventories, from the receipts and adding
opening balance.

2. Consumption of materials should be carefully


checked with the issues to production processes.

3. Provisions of the cost accounting record rules


should be kept in mind, as the rules also specify
accounting requirements for raw materials and other
direct and indirect materials.

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( iii )
WAGES AND SALARIES ;

The following particulars relating to wages and salaries be included in Cost


Auditor's Report,

i- Direct Labor Cost On Production;


Ii- Indirect Employees Cost On Production;
Iii- Employees Cost On Administration;
Iv- Employees Cost On Selling And Distribution;
V- Bonus To Workers And Employees;
Vi- Other Employees Cost, If Any (Including Taxes And Levies
Vii- Total Employees Cost

After the ascertainment of cost is done it has to be then


compared with previous year figures .

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( IV ) INVENTORY VALUATION
qThe various inventory cost formulas (LIFO, FIFO, HIFO),
weighted average cost, base stock, specific
identification, latest purchase price have different
effect on costing and asset valuation.
q

qIf an entity follows a formula which is different from


the one generally followed by the industry, it should be
specially commented upon by the cost auditor in his
report.

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( v ) DEPRICIATION

qCost accounting record order/rules require that record of all fixed


assets, in respect of which depreciation is to be provided, shall be
maintained.
q
qDepreciation is charged according to the depreciation policy of
management, which may be on a straight line or reducing balance
method, based on the useful life of the asset.
q
qAny basis adopted should be consistently followed. If any basis, other
than the useful life of the asset, is followed, the impact of providing
excess or less depreciation should be pointed out.

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( VI ) ALLOCATION OF OVERHEADS ;

The basis of allocation/apportionment of overhead


co st to cost centers should be in accordance with
the

ØAccepted principles of cost accounting.


Ø
ØQuantification of services rendered by service
departments to cost centers.
Ø
ØOn the basis of activities which are cost drivers.

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SCOPE OF COST AUDIT
# 1 . PROPRIETORY AUDIT:
Cost audit as a basis of proprietary audit serves the following ;

üWhether the expenditure is appropriate and not more than what


the situation demands.
 
üWhether any personal benefit has accrued to the sanctioning
authority as a result of this expenditure.
 
üWhether the expenditure has indeed served the purpose for which
it has been incurred.
 
üWhether the prescribed rules and regulations have been duly
followed.
 
üWhether the optimum result has been obtained and whether there
was any other alternative which could have given better results.

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#2. EFFICIENCY AUDIT :
Cost audit as the basis of efficiency audit serves the following.
 
üIn identifying the areas of inefficiencies and weaknesses.
 
üIn determining the appropriate selling price of the commodity
and services.

üIn determining appropriate cost of different products &


services.

üIn ensuring the optimum utilization of the plant capacity.

üIn proper allocation and apportionment of overheads on the most


equitable basis.

üIn creating an atmosphere, Cost conscience through out the


organization.
ü

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: APPOINTMENT OF COST AUDITOR SECTION - 233 B
( 2 ):

oThe cost auditor is to be appointed by the


board of directors with the previous approval
of the central government.
o
o
oThe appointment of cost auditor is valid only
for the year for which he has been appointed.

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: QUALIFICATIONS OF A COST AUDITOR:
 

As per section 233 B ( 1 ) the person to be appointed as a


cost auditor of a company is required ;
 

qTo be a cost accountant within the meaning of the Cost


and works accountant act 1959 .
qTo hold a certificate of practice issued by the
institute of cost and work accountant of India .
q

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:BIBLIOGRAPHY :
 
vCost accounting.
By: DK Mittal
Galgotia publications.
 
vPrinciples & Practice of auditing.
By: Dinkar Pagare
Sultan chand publications.

vManagement accounting.
By: AP Rao
Everest Publishing house.

vCost Audit handbook


(Institute of cost and management accountants of Pakistan).

vwww.scribd.com
(For various documents relating to subject).

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