Cost Audit Hand Book

Research Department
Exposure Draft
Comments are requested by 31st March 2008
January 2008
COST AUDIT HANDBOOK [Third Revised]
REQUEST FOR COMMENTS

The Research, Quality Assurance and Ethics Committee (RQ & EC) of the Institute of Cost and Management Accountants of Pakistan [ICMAP], requests the members of the Institute and other stakeholders for comments on the exposure draft of the third revised Cost Audit Handbook. The comments will be treated a matter of public record. Please email your comments latest by March research@icmap.com.pk or send at the following address: 31, 2008, to
Research Department Institute of Cost and Management Accountants of Pakistan Head Office: ST 18/C, Block 6, Gulshan-e-Iqbal Karachi 75300 Pakistan. Copy of the Exposure Draft can be downloaded from the ICMAPs website at http://www.icmap.com
Copyright January 2008 by the Institute of Cost and Management Accountants of Pakistan. All rights reserved. Permission is granted to make copies of this work to achieve maximum exposure and feedback, provided that each copy bears the following credit line: Copyright January 2008 by the Institute of Cost and Management Accountants of Pakistan. All rights reserved. Used with permission.
Contents
Page Request for Comments Explanatory Memorandum Introduction Background Significant Matters Guide for Commentators Exposure Draft of Third Revised Cost Audit Handbook 1 3 3 3 4 4
EXPLANATORY MEMORANDUM Introduction

This memorandum provides some background to, and an explanation of, the proposed Third Revised Cost Audit Handbook, approved for exposure by the Research, Quality Assurance and Ethics Committee (RQ & EC) of ICMAP.
Background
The first edition of Cost Audit Handbook was published in 2001 and the second revised edition was issued in 2005. The handbook is intended to provide detailed guidance to the members of the Institute in maintaining proper cost accounting records and conducting Cost Audit in accordance with the Companies (Audit of Cost Accounts) Rules, 1998. The core area of specialization of Management Accountants is Cost Accounting, Cost Audit and Management Accountancy. Keeping this perspective in view, the Institute took the following steps:
(a) Drafted Audit of Cost Accounts Rules and, on that basis, the Companies (Audit of Cost Accounts) Rules were approved by the Securities & Exchange Commission of Pakistan (SECP) in July 1998. (b) Developed a Cost Audit Handbook for the guidance of its members.
The Cost Audit is to be carried out by a practicing Cost & Management Accountant as per Cost Audit Rules. Cost Audit Report is the final document produced by a Cost Auditor, which contains all the schedules, required under Companies (Audit of Cost Accounts) Rules 1998. The Handbook includes guidance for all concerned professionals along with the above Rules and Cost Accounting Records Orders for Vegetable Ghee/Cooking Oil, Cement and Sugar Industries for ready reference.
Significant Matters
The Research, Quality Assurance & Ethics Committee (RQ & EC) would, in particular, like to receive comments from the members on the following parts of the Exposure Draft of Third Revised Cost Audit Handbook: (1) Cost Audit Program (inserted in Chapter IV titled Planning Cost Audit) (2) Checklists of Vegetable Ghee / Cooking Oil, Cement and Sugar Industries ((inserted in Chapter IV titled Planning Cost Audit) (3) Manufacturing Flow Charts of Vegetable Ghee/ Cooking Oil, Cement and Sugar Industries ((inserted in Chapter IV titled Planning Cost Audit) (4) New Chapter V titled Manufacturing Processes of Vegetable Ghee/ Cooking Oil, Cement and Sugar Industries (5) Glossary of Technical Terms inserted at the end of handbook.
Request for Commentators

The Research, Quality Assurance & Ethics Committee (RQ & EC) would appreciate comments on all matters addressed in this Exposure Draft. It would immensely help in appreciating the comments if the commentators kindly refer to specific headings; paragraphs, give precise reasons for the comments, and, where appropriate, make explicit suggestions for changes in the draft. The RQ & EC would be greatly encouraged if those valued members of the Institute, who after going through the Exposure Draft have no negative comments to make, please convey their positive agreement with or appreciation of portions of the draft.
Exposure Draft of Third Revised Cost Audit Hand Book
EXPOSURE DRAFT OF THIRD REVISED
COST AUDIT HANDBOOK
Institute of Cost and Management Accountants of Pakistan

ST-18/C, Block-6, Gulshan-e-Iqbal, Karachi-75350, Pakistan. Ph. : (92-021) 9243900-01-02 & 04, Fax : (92-021) 9243342, E-mail : <ed@icmap.com.pk>, Website : http://www.icmap.com.pk
COST AUDIT HANDBOOK

CHAPTER I : THE COST AUDIT 1. Definition 2. Legal Provisions 3. Companies (Audit of Cost Accounts) Rules, 1998 4. Cost Accounting Records Orders CHAPTER II : THE COST AUDITOR 1. Development of Cost Audit Profession 2. Professional Qualifications 3. Appointment 4. Ineligibilities 5. Powers and Duties 6. Liabilities 7. Penalty for Non-Compliance CHAPTER III : PRINCIPLES OF COST AUDIT 1. Planning and Performing Cost Audit 2. Code of Ethics 3. Independence of Cost Auditor 4. Integrity and Objectivity 5. Professional Competence and Due Care 6. Confidentiality 7. Professional Behaviour 8. Technical Standards 9. Professional Code of Ethics 10. Engagement on other occupation CHAPTER IV : PLANNING COST AUDIT 1. General 2. Personnel 3. Documentation 4. Quality Control 5. Cost Audit Programme Annexure A Overall Cost Audit Programme Annexure B Specific Cost Audit Programmes Annexure C Checklists of Vegetable Ghee, Cement & Sugar Industries Annexure D Manufacturing Flow Charts of Vegetable Ghee, Cement & Sugar Industries 5 5 5 6
7 7 7 7 8 9 9
10 10 10 10 11 11 11 11 11 11
12 12 13 14 14

CHAPTER V : MANUFACTURING PROCESSES OF VEGETABLE GHEE, CEMENT AND SUGAR INDUSTRIES 1. Manufacturing Process of Cement 2. Manufacturing Process of Sugar 3. Manufacturing Process of Vegetable Ghee / Edible Oil
40 43 45
CHAPTER VI : PERFORMING COST AUDIT, BACKGROUND KNOWLEDGE AND AUDIT PROCEDURES 1. Knowledge of the industry and the entity 2. Organisational set-up 3. Company Representations 4. Production 5. Gathering Cost Audit Evidence CHAPTER VII : PERFORMING COST AUDIT, IMPORTANT ELEMENTS OF COST 1. Raw Materials 2. Wages and Salaries 3. Stores and Spare Parts 4. Power and Energy 5. Repairs & Maintenance 6. Depreciation 7. Overheads CHAPTER VIII : COST ACCOUNTING SYSTEM AND RECONCILIATION 1. Determining of Unit Cost 2. Cost Accounting System 3. Integrated Cost Accounting System 4. Reconciliation with Financial Accounts CHAPTER IX : COST AUDITORS REPORT 1. Submission of Cost Audit Report 2. Appendix III of Companies (Audit of Cost Accounts) Rules, 1998. 3. Royalty/Technical Aids Payment 4. Abnormal non-recurring features 5. Cost of Production 6. Sales and Profitability 7. Cost Auditors Observations and Conclusions.
47 47 48 49 49
51 52 53 53 54 54 55
56 56 58 58
59 59 60 60 60 60 61
APPENDICES I. II. III. IV. V. Companies (Audit Of Cost Accounts) Rules, 1998 Example of Cost Audit Acceptance Letter Vegetable Ghee and Cooking Oil Companies Order, 1990 Cement Industry (Cost Accounting Records) Order, 1994 Sugar Industry (Cost Accounting Records) Order, 2001 63 73 75 95 121
GLOSSARY OF TECHNICAL TERMS
141
CHAPTER I
Cost Audit
1. Definition: Cost audit is an examination of cost accounting records and verification of the facts to ascertain that the cost of the product under reference has been arrived at in accordance with principles of Cost Accounting and evaluation of adequacy of proper Cost Accounting Records and their maintenance. The cost audit is performed by an independent, professionally qualified Cost and Management Accountant or Chartered Accountant. Cost audit is carried out to evaluate cost performance of the entity for which Cost Accounting Records have been prescribed by the Securities and Exchange Commission of Pakistan (SECP). The Cost Auditor, therefore, carries out such tests and makes such inquiries which enable him to give a professional, independent, unprejudiced opinion on the cost performance of the entity, as reflected in the cost information provided in the schedules and annexures which are prepared by the entity in accordance with the cost accounting records maintained. 2. Legal Provisions:
The Companies Ordinance 1984 while providing for the books of accounts to be kept by a company under Section 230, makes an additional provision in sub-section (1) (e) of that Section which reads: in the case of company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labour or to other inputs or items of cost as may be prescribed, if such class of companies is required by the Authority by a general or special order to include such particulars in the books of accounts. The Companies Ordinance 1984 provides for Audit of Cost Accounts vide Section 258 which reads:258. Audit of Cost Accounts.- (1) Where any company or class of companies is required under clause (e) of subsection (1) of Section 230 to include in its books of accounts the particulars referred to therein, the Federal Government may direct that an audit of cost accounts of the company shall be conducted in such manner and with such stipulations as may be specified in the order by an auditor who is a chartered accountant within the meaning of the Chartered Accountants Ordinance,1961 (X of 1961), or a cost and management accountant within the meaning of the Cost and Management Accountants Act, 1966 (XIV of 1966); and such auditor shall have the same powers, duties and liabilities as an auditor of a company and such other powers, duties and liabilities as may be prescribed. 3. Companies (Audit of Cost Accounts) Rules, 1998:
The basic structure of the Cost Audit has been laid down in the Companies (Audit of Cost Accounts) Rules, 1998. Cost Audit has to be carried out every year from 1997-98 in all industries to which Cost Account Records Orders issued by SECP apply. Cost audit ascertains compliance with Cost Accounting Record Orders. During cost audit, the cost accounting system is also studied, which should be proper and adequate for ascertaining cost of the product under reference and for providing all information required to complete the prescribed schedules and annexures given in the relevant cost accounting record orders/rules. Companies (Audit of Cost Accounts) Rules 1998 have been published as Appendix I.
4.
Cost Accounting Records Orders:
Under Sub-section (I)(e) of Section 230 of the Companies Ordinance 1984, the SECP (former Corporate Law Authority) framed the Vegetable Ghee and Cooking Oil Companies (Cost Accounting Records) Order, 1990 which came into force from 1st January 1991. Subsequently the Cement Industry (Cost Accounting Records) Order 1994 and Sugar Industry (Cost Accounting Records) Order, 2001 were framed by SECP which came into force from 1st July 1994 and 13th February 2001 (Appendix III, IV and V). Under these three Orders, Vegetable Ghee and Cooking Oil Companies, units of Cement Industry and Sugar Industry are required to maintain cost accounting records to provide cost accounting information in a verifiable form, required to fill in the schedules and annexures prescribed in these orders. Other industries may be brought within the ambit of Cost Audit as and when relevant Cost Accounting Records Orders are issued.
CHAPTER II
Cost Auditor
1. Development of Cost Audit Profession: During World War I, a large number of contracts were awarded on cost plus basis, which made it necessary for the contractors to maintain cost accounting records. Cost Accounting techniques are needed not only to help the management exercise cost control, but the cost accounting records are also needed for such clients who place orders on cost plus basis. In such cases, the client has the right to examine cost accounting records or have performed cost audit. In USA, Defence suppliers and contractors have to maintain cost accounting records in accordance with Cost Accounting Standards laid down by the Cost Accounting Standards Board (CASB). This is subject to cost audit to ensure its authenticity. The Cost Accounting in its developed form helps the management of manufacturing concerns in improving the efficiency, in making the business decisions and in evaluating the performance of entities in the same industrial sector through standardizing the systems and procedures. However, it is only in India, Pakistan and Bangladesh that cost audit has been formalized under Companies Ordinance/Acts. India is the pioneer in introducing Cost Audit since late 60s and now over 40 industries are covered under Cost Audit Scheme. In India and Bangladesh, only Cost and Management Accountants are eligible to conduct cost audit. In Pakistan, Chartered Accountants are also eligible to conduct cost audit. 2. Professional Qualifications:
Statutory cost audit was introduced in Pakistan under the Companies (Audit of Cost Accounts) Rules 1998 [Appendix I]. Under sub-rule (I) of Rule 3 thereof, it has been laid down that every company shall be required to get its cost accounts audited by a cost auditor who is a Chartered Accountant within the meaning of the Chartered Accountants Ordinance 1961 [X of 1961] or a Cost and Management Accountant within the meaning of the Cost and Management Accountants Act, 1966 [XIV of 1966]. 3. Appointment:
Under sub-rule (2) and (3) of Rule 3 of the Companies (Audit of Cost Accounts) Rules 1998, the cost auditor shall be appointed by the directors with the prior approval of the SECP within 60 days of the close of the financial year of the company. The company shall apply to the SECP in the form, set out in Appendix-I to the Companies (Audit of Cost Accounts) Rules 1998, for appointment of cost auditor, not later than 30 days before date on which cost auditor is to be appointed. The cost auditor is appointed by the directors subject to the prior approval of the SECP. An example of an audit acceptance letter is shown as Appendix II at the end of this Handbook. The example or any variation of it may be used after the directors of the client company have agreed to appoint the cost auditor and have applied to the SECP, in the prescribed form, for its prior approval. 4. Ineligibilities:
The persons ineligible for appointment as Cost Auditor have been specified in sub-rule 4 of Rule 3 of the Companies (Audit of Cost Accounts) Rules, 1998. Cost and Management accountants in practice, who are not eligible for appointment as cost auditor should not offer themselves for appointment. The ineligibilities are briefly explained as under: (i) The same accountant or accounting firm, who has been appointed as an auditor of the Company, under Section 252 of the Companies Ordinance 1984 shall not be appointed as a cost auditor. A financial or corporate auditor of a company, therefore, shall not be appointed as a cost auditor of the same company at the same time. Accountants who are already acting as auditors of financial statements of a company shall not be appointed as cost auditors of the same company.

(ii) A person who is, or has been at any time during the preceding three years, a director, officer or employee of the company shall not be appointed as cost auditor. A person who is a partner of a director, officer or employee of the company; or an employee of a director, officer or employee of the company shall not be appointed as a cost auditor. The cost auditor cannot be a partner or an employee of any director, officer or employee of the company. A spouse of a director of the company shall not be appointed as a cost auditor of that company. A person who is indebted to the company for any amount at the relevant time. A corporate body shall not be appointed as a cost auditor. A cost auditor, therefore, has to be an individual or a firm, and not a corporate body. Powers and Duties:
(iii)
(iv) (v) (vi)
5.
Statutory provisions regarding audit of cost accounts are contained in Section 258 of the Companies Ordinance 1984. These are reproduced below: Section 258. Audit of Cost Accounts: (I) Where any company or class of companies is required under clause(e) of sub-section(1) of Section 230 to include in its books of accounts the particulars referred to therein, the Federal Government may direct that an audit of cost accounts of the company shall be conducted in such manner and with such stipulations as may be specified in the order, by an auditor who is a chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961), or a cost and management accountant within the meaning of the Cost and Management Accountants Act, 1966 (XIV of 1966); and such auditor shall have the same powers, duties and liabilities as an auditor of a company and such other powers, duties and liabilities as may be prescribed. The cost auditor has the same powers and duties as the financial auditor may have in terms of Section 255, including the following:(1) Every auditor of a company shall have a right of access at all times to the books, papers, accounts and vouchers of the company, whether kept at the registered office of the company or elsewhere, and shall be entitled to require from the company and the directors and other officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditors. In the case of a company having a branch office outside Pakistan, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and papers of the branch as have been transmitted to the principal office of the company in Pakistan. If any officer of a company refuses or fails, without lawful justification, the onus whereof shall lie on him, to allow any auditor access to any books and papers in his custody or power, or to give any such information possessed by him as and when required, or otherwise hinders, obstructs or delays an auditor in the performance of his duties or the exercise of his powers or fails to give notice of any general meeting to the auditor, he shall be liable to a fine which may extend to five thousand rupees and in the case of a continuing offence to a further fine which may extend to one hundred rupees for every day after the first during which the default, refusal or contravention continues. Records for Cost Audit and Financial Audit :-
(2)
(3)
5(a)
Section 255 and its sub-sections quoted in the foregoing paragraph defines the powers and duties of auditors,appointed under Section 252(1) of the Ordinance and auditors and duties of auditors appointed under Section 252(1) of the Ordinance and auditor appointed under Cost Audit Rules. References made in the sections to books of accounts and to balance sheet, profit and loss account or income and expenditure account for the financial

auditor would mean accounting records and capacity utilisation statement, statement of closing stock and cost accounting statements (schedules and annexures) would mean cost records for the cost auditor. Although the role of the cost auditor has been defined while discussing the objectives of cost audit, the position of the financial auditor and that of the cost auditor, are slightly different. The position of an auditor of the Company is construed as a servant of the shareholders and it is his duty to examine the affairs of the company on their behalf and report to them his findings. The position of a cost auditor, however, is different because he is appointed by the management (Board of Directors), subject to prior approval of Securities & Exchange Commission of Pakistan, and his position is to be interpreted in view of the provisions of the Companies (Audit of Cost Accounts) Rules 1998. 6. Liabilities:
A cost auditor, while examining the cost accounting records, is required to exercise reasonable care and skill. What is reasonable care and skill, depends on the circumstances of each case. If an auditor does not take reasonable care and does not exercise skill, his failing even in one instance could be construed as negligence if not worse. An auditor is not bound to be a detective. His role becomes amply clear with the discussion of professional competence and professional ethics in Chapter III of this Handbook. However, failure on the part of an auditor makes him jointly and severally liable with those who are responsible for the management of the company. 7. Penalty for non-compliance:
A cost auditor has to comply with the provisions of the Companies Ordinance to avoid any penalty. Sub-sections (1) and (2) of Section 260 of the Companies Ordinance, 1984 read: (1) If any auditors report is made, or any document of the company is signed or authenticated otherwise than in conformity with the requirements of Section 157, Section 255 or Section 257 or is otherwise untrue or fails to bring out material facts about the affairs of the company or matter to which it purports to relate, the auditor concerned and the person, if any, other than the auditor, who signs the report or signs or authenticates the document, and in the case of a firm, all partners of the firms shall, if the default is willful, be punishable with fine which may extend to two thousand rupees. (2) If the auditors report to which sub-section (1) applies is made with the intent to profit such auditor or any other person or to put another person to a disadvantage or loss for a material consideration, the auditor shall, in addition to the penalty provided by that sub-section, be punishable with imprisonment for a term which may extend to six months and with fine which may extend to two thousand rupees.
10
CHAPTER III
Principles of Cost Audit

1. Planning and Performing Cost Audit: There are certain principles that the cost auditor has to observe in planning and performing the cost audit. There are also principles that the cost auditor has to see are being observed by the company he is auditing. On the one hand, the cost auditor has to safeguard his independence and professional status in planning and performing the cost audit, ensuring quality and standard of cost audit, as required by his professional body , the ICMAP, as well as by the Companies Ordinance 1984, and the Companies (Audit of Cost Accounts) Rules 1998, and other rules regulating his audit engagement and reporting. On the other hand, he has also to see that the client unit operates within the legal framework provided for the industry, maintaining cost accounting records, in accordance with the cost accounting records order rules applicable to the industry. 2. Code of Ethics:
Cost Auditor should comply with the code of ethics for professional accountants. The fundamental principles governing the professional responsibility of the Cost Auditors are enumerated as follows: a. b. c. d. e. f. g. 3. independence; integrity; objectivity; professional competence and due care; confidentiality; professional behaviour; and technical standards. Independence of Cost Auditor:
The independence of the cost auditor is largely covered by the Companies (Audit of Cost Accounts) Rules 1998, under which a person who has or had specified relationships, which go to mar his independence, cannot be appointed as a cost auditor. 4. Integrity and Objectivity:
Integrity implies not only honesty but fair dealings and truthfulness. The principle of objectivity imposes the obligation on all professional accountants to be fair, intellectually honest and free of conflict of interest. Financial involvement with the client effects independence and may lead a reasonable observer to conclude that it has been impaired. A professional cost and management accountant should be straightforward and honest in rendering professional services as a cost auditor. He has neither any ulterior motives nor any personal ends to serve. He should be fair and should not allow any prejudice or bias, conflict of interest or any other influence to override objectivity. Cost audit is to meet the managements and the Governments need for credibility in cost information and cost accounting systems.

5. Professional Competence and Due Care:
11
A professional accountant should not project himself as having expertise or experience which he does not possess. Attainment of professional competence requires a high standard of general education followed by specific education, training and examination in professionally relevant subjects and a period of work experience, with which all ICMAP members are equipped. Professional competence requires to be maintained by a continuing awareness of developments in the accountancy profession, including relevant national and international pronouncements on accounting, auditing and other relevant regulations and statutory requirements. The cost and management accountant has to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service, based on up-to-date developments in practice, legislation and techniques. 6. Confidentiality:
A cost and management accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. The duty of confidentiality continues even after the end of the relationship between the cost auditor and the client or the cost and management accountant and the employer. 7. Professional Behaviour:
A professional Cost and Management Accountant, being a member of the Institute of Cost and Management Accountants of Pakistan, should act in a manner consistent with the good reputation of the profession. He should meticulously avoid any such conduct or behaviour as may cast an unfavourable aspersion on the profession. He has to ensure professional behaviour while meeting his responsibilities to clients, third parties, other members of the cost and management accounting profession, staff, employers and the general public. 8. Technical Standards:
A professional Cost and Management Accountant should carry out professional services in accordance with the relevant technical and professional standards. A Cost and Management Accountant has a duty to render professional services with care and skill, in accordance with the instructions of the clients or employers, insofar as they are compatible with the requirements of integrity, objectivity, and in the case of Cost and Management Accountants in public practice, independence. Moreover, they have to conform to the technical and professional standards laid down by the Institute of Cost and Management Accountants of Pakistan, IFAC, IASC and the relevant laws, orders, rules and regulations. 9. Professional Code of Ethics:
A distinguishing mark of a profession is its acceptance of responsibilities to the society. The Cost Auditors independence is to be judged by his clients, Government, employers, employees, investors in the business, the financial community and the consumers at large, who all rely on the objectivity and integrity of the Cost and Management Accountant. This reliance imposes a public interest responsibility on the professional cost and management accountant. 10. Engagement on other occupation:
A professional accountant in public practice should not concurrently be engaged in any business occupation and activity which might impair his integrity, objectivity or independence or the good reputation of the profession. The code of professional ethics of the Institute of Cost and Management Accountants of Pakistan must be carefully observed.
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CHAPTER IV
Planning Cost Audit

1. General: (i) Cost Audit should be planned with professional care, recognising that circumstances may exist to cause the cost statements to be materially misstated. For example, management will be providing cost accounting information in the Schedules and Annexures prescribed in the cost accounting record orders/rules, and also statements regarding capacity and inventories. The cost auditor will be finding evidence to support the information provided; but he is not to assume it is necessarily correct. The cost audit should be so programmed and conducted as to provide reasonable assurance that the cost information provided in the Schedules and Annexures, taken as a whole, are free of material misstatement. Reasonable assurance is a concept relating to the accumulation of audit evidence, necessary for the cost auditor to conclude that there are no material misstatements in the cost accounting information and statements, taken as a whole. The concept relates to the whole audit process. Acquiring an undertaking of the industry, studying the clients organisational set-up and the cost accounting control exercised over the various elements of cost are all a part of conducting the cost audit procedures. In planning cost audit, the personnel requirements of an assignment; documentation of the cost audit procedures and of audit evidence and quality control exercised over performing cost audit being important factors, are briefly discussed here.
(ii)
(iii)
This chapter relates to the planning done in the cost auditors office and the documentation, which has to be looked after by the cost audit staff. 2. Personnel:
Cost audit work is to be assigned to personnel who have the degree of technical training and proficiency required in the circumstances. The personnel needs should be planned, keeping in view the staffing and timing requirements of specific cost audit. Qualifications of personnel as to experience, position, background and special expertise should be evaluated. Care should be exercised not to assign any staff who may have any disqualifying relationship. The following aspects of personnel are also to be considered: (i) Experience: Experience and training of cost audit personnel should be considered, particularly keeping the relevant industry in view, as the cost and management accounting procedures and techniques considerably differ on the basis of the nature and type of industry. Earlier cost audit or other practical experience of the industry helps in carrying out cost audit of a unit of that industry. (ii) Directions: Assistants to whom work is to be delegated need appropriate direction and supervision. Direction involves informing assistants of their responsibilities and the objective of the procedures they are to perform. It includes informing them about the nature of the industry, possible cost accounting and auditing problems that may affect the cost audit routine and the procedures that they are to perform. The cost audit programme, in providing the time budget and the overall audit plan, should also prove helpful in providing necessary audit directions.

(iii) Supervision:
13
Supervision involves both direction and review of audit work. Personnel carrying out supervisory responsibilities generally perform the following functions during cost audit: a) monitor the progress of the cost audit and also assess that: i the assistants have the necessary skills and competence to carry out their assigned tasks; ii iii assistants understand the cost audit directions; and the cost audit is being carried out according to the overall cost audit plan and the cost audit programme. b) stay aware of the cost accounting and cost auditing questions, raised during the cost audit, assess their significance and modify the cost audit plan and the cost audit programme, as considered necessary; and remove any differences of professional judgement between the personnel and decide the level to which making reference is appropriate. Documentation:
c)
3.1
The cost auditor should document all matters which are important in providing evidence to support the opinion given in the cost audit report. Documentation here means the working papers prepared by and for, or obtained and retained by the cost auditor in connection with the performance of cost audit. Working papers may be in the form of data stored on paper, film, electronic media or other media. Working papers record the audit evidence, resulting from the cost audit work performed, to support the cost auditors opinion. The extent of working papers is a matter of professional judgement. They may cover the detailed aspects of the cost audit or may include the daily work sheets or daily diary maintained by each member of the cost audit staff engaged on the assignment. The daily work sheets should include all queries raised; with whom each was discussed and how; and if they were satisfied. The form and content of the working papers will be determined by the nature and complexity of the business, nature and condition of the entitys cost accounting and internal control systems. Use of standardised working papers (such as checklists, confirmation forms, standard letters etc.) may improve the efficiency with which such working papers are prepared and reviewed. Standardised working papers facilitate delegation of work and provide a means to control quality of work. Schedules, statements, analyses and other documents prepared by the entity may be utilised and made a part of the cost audit working papers, only after being satisfied that the materials have been properly prepared with due care. 3.2 Confidentiality of Working Paper:
The cost auditor should adopt appropriate procedures for maintaining the confidentiality and safe custody of the working papers and for retaining them for a period sufficient to meet the needs of the practice and in accordance with legal and professional requirements of record retention. Working papers are the property of the cost auditor. Although portions or extracts from the working papers may be made available to the entity at the discretion of the cost auditor, they are no substitute for the cost accounting records that the entity has to maintain under the cost accounting records orders rules, applicable to the industry.

3.3 Working Paper Management
14
Working paper management improves the cost audit productivity. The essential aspect of such management is quick retrieval of information from the files of working papers. The filing system should be sound. Normally working papers are organised into: Permanent file, Working file and Correspondence and Administrative file. Papers which normally do not change from year to year are kept in the Permanent file. Permanent file will have write- up on the organisation, manufacturing process etc. The Permanent file is updated at the beginning of every audit, making changes, if any, since the previous audit. Working paper file contains details relating to the year of audit. There will be a separate working paper file for every year. This file should be properly indexed and divided into convenient sections. File management is a matter of personal preference of the cost auditor. 4. Quality Control:
Quality Control policies and procedures should be implemented both at the level of the cost audit firm and individual cost audits. The cost auditor should implement quality control policies and procedures designed to ensure that all cost audits are conducted in accordance with international audit standards or relevant national standards or practices. Quality control procedures, to a large extent, depend on strict adherence to the laws, orders and rules applicable to cost audits. The objectives of the quality control policies and procedures include professional requirements, skills and competence, assigning work to personal having technical training and proficiency, providing sufficient direction, adequate supervision and review of work. Every cost auditor has to continuously, monitor that the quality control policies and procedures are being followed and the quality of work is being effectively achieved. Quality control policies and procedures should not only be communicated to personnel but also explained and some training provided to them to ensure that the policies and procedures are understood and implemented. The cost auditor and his staff members with supervisory responsibilities will consider the professional competence of assistants performing work delegated to them, when deciding the extent of direction, supervision and review appropriate for each assistant. Any delegation of work to assistants should be on the basis of reasonable assurance that such work will be done with due care by persons having the degree of professional competence required in the circumstances.
4.
Cost Audit Programme:
The Cost Auditor should develop a cost audit programme setting forth the procedures that are required to implement the cost audit plan. The programme is basically based on the objectives for each area and must have an appropriate detail to serve as a instrument of instruction to the audit staff. It also serves as a means to control the adequate execution of cost audit work. It helps the audit staff to perform their jobs in a systematic way and also enables them not to overlook any important point while conducting audit. Furthermore, it facilitates the Cost Auditor to make a final review of the work already done, before signing cost audit report. There are four Annexures i.e. A, B, C & D, given at the end of this Chapter. The brief descriptions of these annexures are as under: Annexure A indicates an overall cost audit programme that includes an initial cost audit plan covering all aspects of cost audit of a unit. It should be prepared with due care after making a thorough study of the entire set up of an organization. This may help the cost auditor to identify and collect the desired information from the respective departments and cost centers. Annexure B exhibits specific audit programmes of various costs of production items. These would facilitate the cost auditor to check all items indicated therein. Annexure C comprises of all essential production items that must be acquainted with by the cost auditor. A thorough study of these lists would help him to develop an appropriate plan for cost audit. Annexure D contains the production flow charts of Cement, Sugar and Vegetable Ghee & Cooking Oil companies. These charts would help the cost auditor to comprehend and fully grasp the production process of each industry.

Annexure A COST AUDIT PROGRAMME An overall cost audit programme is drawn up as under for guidance of the Audit Staff: Planning Phases 1. Familiarisation with the company: (a) Nature of business and industry (b) Objectives of the company. e.g. Maximisation of Profits Market expansion Market diversification Product diversification, etc. Comment: The specific business objectives shall also be checked and notes kept in respect thereof, as contained in the Memorandum of Association (c) Ownership, e.g. public or private Major Shareholders Management Position of Shareholders Action to be taken Acquire the previous years Annual Reports and Accounts. Keep notes.
15
Identify
Identify Keep Notes
(d) Corporate structure, e.g. Subsidiaries and Affiliates Ownership percentage Dates of acquisition 2. Company records: Memorandum and Articles of AssociationForeign technical collaboration & agreement Other agreement deeds or contracts Including that of inter-company transactions. Secretarial records and registers. Comment: Only material information needed to be obtained/notes kept in respect of that contained in the secretariat records and registers, since these contain much detailed information relating to different statutory matters. 3. Familiarisation with the Organogram of the Company: (a) Director of Finance and Accounting. (b) Other Directors & Key personnel. (c) Delegation of Financial and Administrative Authorities
Obtain copies. Keep Notes.
Keep Notes
4. Familiarity with organisation profile: Main or Central or Head Office Administration Offices Other functional managements, e.g. Purchase, Sales, Production, Finance. etc. Background of Key personnel
Obtain detailed organisation chart showing functional relationships.

5. Familiarity with the company policies: (a) Capitalisation: Debt/Credit lines-short-term Seasonal capital requirements Short-term obligations Long-term obligations
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Keep Notes Identify
(b) Products or Services: Main Product lines By-product lines Production sites (c) Inter-company transactions policies (d) Other important policies
Obtain a Chart. Keep notes.
Identify
6. Sales policy and sales management: Pricing Policies-Home and export sales Export Policy Exporting countries Export/Import Control Order-effect, Product image-place in national economy Own country sales policy Distribution policy Credit and collection policy Keep Notes Identify Keep Notes
7. Production planning and control: Types of manufacturing process Process layout, Product layout. Production plans, scheduling etc. Plant capacities and other facilities. Detailed manufacturing process Obtain the process flowcharts. Planning schedules, and charts for Licensed and installed capacities.
8. Accounting systems: Financial accounting Cost accounting, Integrated accounts Internal control set-up Store accounting Trial balance Obtain the procedures manual, if any.
9. Management information systems: Budget Controls Standard costing Obtain an outline of the schemes adopted, if any.

10. Internal audit system and Internal control Systems / Internal Audit Programmes. Internal Audit Manual Obtain Internal Auditors reports on areas covered.
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11. Cost records, statements and reports: (a) (b) (c) (d) Cost accounting records and other related records. Cost Statements and related subsidiary Statements Cost Accounts Manual Previous cost auditors reports (if any) Obtain them from the cost department.
12. Cost audit programmes on each significant Audit area: (a) General, e.g. production and service departments, Cost centres, costing methods internal Checks and controls, system of classification, codification of cost items. etc. (b) Specific, e.g. systems of purchase, storage, issues of materials, stock-taking and accounting practices, systems of labour attendance, wages and transfer records, systems of overheads classification, allocation and apportionment records, systems of inventory, Adjustment of cost variances from standard costing, Trial Balance, Profit and Loss Account, control account (c) System of reconciliation between cost and financial records. Matters or conditions requiring special attention e.g., material error, accounting problems, changes in technology, labour incentive schemes. etc. (a) Prepare audit programmes and allot a time-schedule for completion of audit. (b) Allot and assign the audit personnel. (c) Collect audit evidences as to accuracy, relevance, objectivity and fairness during execution of programmes.
(d) Identify them for clarification and obtain documentary evidences. (e) Identify and document for audit considerations.
13. Coordination & Review of sectional audit programme: (a) Rotation of emphasis on specific audit areas. Further audit scrutiny. Scanning of audit evidences, Scrutiny and finalisation of audit evidences. (b) Identify specific audit areas. Document the audit evidences duly referenced to the basic records, etc.
14.
Audit evidence: For reporting information on companys (or products) financial position, production statistics, raw materials, power and fuel, wages and salaries, stores and spare parts, overheads, royalty and technical payments, sales statistics, abnormal non-recurring costs, manpower utilization (a) Collect the information based on verification during the course of audit. (b) Keep working papers duly referenced.

15. Finalisation of Cost Audit Report: (a) Draft matters to be qualified in the report. (b) Draft Cost Audit Report (Annexure & Proforma). (a) Obtain comments from the company Management. b) Final check.
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Prepared by:
Name & Date -----------------Cost Auditor

Annexure B COST AUDIT PROGRAMME General WORKING PAPER (W/P) REFERENCE INITIALS DATES
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AUDIT STEPS
1) Study and examine the chart of accounts with special reference to the system of cost methods adopted by the company. 2) Study the basic raw and packing materials, chemicals and stores required for the manufacture of the product and their sources. 3) Study the organizational structure and know the details of manufacturing process. 4) Examine whether cost centres are splitup into production & services functions 5) The licensed capacity and installed capacity should be ascertained. Any addition to production capacity during the preceding two years shall also be ascertained 6) Examine the adequacy of internal checks and control. 7) Before starting audit, meet the various important executives of the company and note down the functions, responsibilities and power delegated to each. 8) Obtain an understanding of the clients business and the production processes involved, the flow of the process, till the finished goods are packed and transferred to the finished stores for despatch. 9) Obtain the Balance Sheets of the company for the past two years and make a note of the important points contained n the Directors Report to the shareholders on the various financial, operation and technical matters. 10) Have a look into the books/ record containing production etc, statistics maintained by the factory in compliance with the excise and other Government requirements and note down the licensed/ installed capacities. Ascertain the reasons for shortfall in production, if any., 11) Study the Cost Accounting System followed by the company in respect of the products under Cost audit and examine its adequacy with reference to the Cost Accounting Records Rules. 12) Examine whether the company has proper and adequately identified the various production and service cost centres and whether the expenditure has been initially booked to these cost centres correctly. 13) Examine the service cost statements, viz. steam, power, air conditioning, etc. and whether these are allocated properly to the various cost centres. In respect of supplies made to or received from other units of the company, ensure that the rates charged are reasonable and that the method followed are consistent.

14) Compare actual production with the installed capacity. 15) Reconcile quantity of production with that of sales, captive consumption and stocks in respect of each quality of product. 16) Ascertain any abnormal reasons for low productions and/ or high usage of services and high down time in the plant. Find out whether these have been properly recorded and reported separately. 17) Verify whether consistency is maintained with regard to cost accumulation, cost allocation, cost analysis, cost treatment and costing procedures adopted for inventory valuation from period to period. 18) Examine the records maintained for inter-company transfers. 19) Ascertain if any Royalty/Technical Services Fee has been paid to Collaborator/Technology Supplier. If it is one time payment /lump sum check the charge to cost of product is equitable and reasonable. 20) Examine the Royalty agreement and check the details furnished. 21) Check Quality Control Expenses and see whether the company has ISO certificate or not. If yes, verify the certification number, category in which the company is certified. Moreover, also check the amount incurred on the quality control, quality audit etc and their treatment in the cost of product. 22) Examine whether the company is complying with the various legislation provision with respect to pollution control and the expenses incurred therein. 23) Examine whether detail with respect to WTO requirements are maintained to assess its competitiveness in global market for import / export. 24) Verify the cost of production details for domestic sale and export, which is required under WTO/Anti-dumping exercise against dumping of goods. 25) Examine the methodology adopted for value addition. All materials such as raw materials, components, packing materials, process materials, stores and spares, consumables etc and purchased services such as power, water etc are to be excluded. 26) Verify the financial ratios and examine the capital employed for the product with reference to Cost centre-wise fixed asset register and working capital required. 27) Verify the details of sales tax paid. 28) Verify the reconciliation statement between the profit/ loss as per the cost accounts and profit/ loss as per the financial accounts. Also examine the variations and reasons thereof. 29) Examine whether the data maintained in the cost record are reconciled with the relevant returns submitted by the company to government authorities.
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30) Where a system of standard costing is used, it should be ensured that such costs are converted into actual for the purpose of determining the figures required to comply with the requirements of Cost Accounting Record Rules. The Cost Auditor should study and examine the method of adjustment of variances to arrive at the actual cost from the standard cost. 31) Examine that cost statements have been prepared as per requirements of Cost Accounting Records Rules and Cost Audit Report Rules. 32) The annexure to Cost Audit Report Rules and Proforma prescribed under the Rules has been authenticated and signed by concerned authorities of company. 33) Examine whether there are any abnormal features affecting production during the year, e.g., strikes, lock-outs, major breakdowns in the plant, substantial power cuts, serious accidents, etc., and what is their impact on the cost of production. 34) Examine if there are any special expenses, which have been directly allocated to products under reference, and what is the total amount as also the incidence per unit of product.
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Prepared by: Name & Date
----------Cost Auditor
COST AUDIT PROGRAMME Materials WORKING PAPER (W/P) REFERENCE INITIALS DATES
AUDIT STEPS
1) Examine the stores ledger for raw materials and specific stores etc. in respect of receipts, issues and balances both in quantities and values. 2) Examine the procedure for purchase of raw materials and the standards fixed for its quality control. 3) Check the rebate to be deducted from suppliers bills in case of supply of substandard materials 4) The receipt entries should be verified with reference to suppliers invoices and delivery challans. Goods received notes and the contracts entered into with the suppliers should be examined. Any excess or short supplies made by the parties, the basis on which such excess / short supplies were settled to be looked into carefully.

5) Check the correctness of accounting of transit losses (if any) of raw materials. 6) Study the basis of classification of material cost into direct and indirect categories. 7) The system and frequency of stock verification should be looked into carefully. Authorization for adjustment of physical inventory differences should also be noted. 8) Verify that all the goods received within the financial year are included in purchases. 9) Check purchase returns with original invoices and verify credit obtained from the suppliers. 10) Reconcile the value of material issued by the Stores and received by the Plant. Check and reconcile the movement of material to plant and process. 11) Verification of material consumption ratios from the actual figures should be examined. 12) Check the production yield and ratios of process loss. 13) A list of non-moving and slow-moving store items should be prepared and the value of such items of stores in relation to total closing inventory should be determined. 14) Examine the chemical consumption with reference to raw material mix. 15) Study the store accounting systems and procedures followed by the unit for indenting, purchasing, receiving and inspection and delegation of powers to the various authorities in this regard. Check the adequacy of the systems as appropriate for inventory control. 16) Collect a set of documents/ proformae used for recording arrival of materials at the factory, their acceptance into stock, issues for consumption, return and transfer of materials between the departments and stores, physical verification of stocks, written off unserviceable materials etc. 17) Examine the system of passing and payment of purchase bills to ensure that there is no scope of fraudulent or duplicate payment. 18) Examine and note any delays in accounting of materials after their receipt in the factory. 19) Check whether the bin cards and individual material wise priced stock ledger are maintained. Also check whether bin cards are posted chronologically and how often balances as per bin card are compared with priced stock ledger. 20) Check the serial number control of the documents for receipts, issues and returns and transfers. 21) Examine the procedure for issues of materials to the user departments.
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22) Verify entries into the priced stock ledger in respect of receipts, issues, returns with reference to goods received notes, requisitions, return notes, suppliers bills etc. 23) Check whether freight and all other incidental expenses have been considered as part of the individual items of material cost. 24) Check the material issue analysis with special reference to non-production stock materials issued for non-production activities including capital jobs. 25) Compare actual quantities consumed in respect of key raw materials, with their estimated / standard quantity contents in actual finished products and ascertain reasons for significant over or under usages. 26) Examine how losses of materials in storage and in process are accounted for and whether these are satisfactory according to cost accounting principles accepted as authoritative. 27) Scrutinize the transit losses register and verify the amounts reimbursed by the Insurance Company. 28) Examine if any stores/ materials have been written off. If so, review the total amount written off under each category damaged, obsolete and surplus stock for reasonableness and compare with previous years. Also examine the system and authority for adjustment of physical shortages and surplus found on physical stock taking. 29) Compare stores and stock levels with standards fixed and with preceding year levels. Obtain explanations of significant variations. 30) Check the valuation of year-end stock of materials, work-in-progress and finished stocks. 31) Where computerized accounting is in vogue, find out what control checks have been built up in the computer system. 32) Check measuring devises available in stores, which are utilized for measuring incoming and outgoing stores. 33) Obtain the list of closing stocks of important raw materials by quantity and value at the end of the accounting year and calculate how many months requirements are held in stock and ascertain reasons for abnormal stock holdings. 34) Obtain and check the list of materials, especially stores and spare parts that have not moved over two years with the stores ledger. 35) Check the system of classification of materials into direct and indirect categories. 36) Reconcile consumption by adding purchases with opening balance and deducting closing stocks form the total thereof. 37) Checks the records showing generation / purchase of electricity, steam, chilled water, treated water, etc and their distribution to various cost centres.
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38) Check the correctness of various elements of costs of these utilities and compare the unit cost of generation with budget or previous periods. 39) Verify the basis of distribution of the cost to various cost centres and assess whether the bases are reasonable. 40) Check if the transport costs are significant, in which case the same shall be shown separately.
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COST AUDIT PROGRAMME Labour, Salaries & Wages WORKING PAPER (W/P) REFERENCE INITIALS DATES
AUDIT STEPS
1) The total wages charged in the cost records should be reconciled with the total wages paid during the financial year. 2) Study the basis of classification of labour cost into direct and indirect costs. 3) Scrutinize the break-up of salaries and wages charged to production, administration and selling and distribution. 4) Examine the system of authorization of overtime work and its treatment in costs. Also check the effect of absenteeism and its relationship with overtime in multiple shift working. 5) Check whether the method of allocation of wages and salaries to production jobs, service jobs and capital jobs, has been consistently applied. 6) Check the calculation of incentives or bonus for direct and indirect workers. 7) Study the variation in standard labour efficiency from actual figures and analyse the cause of variations. 8) Examine the treatment of idle time and lay-off payments in cost. 9) Review the system of recording of attendance at the Time Office and booking of time in the department for all employees, i.e. direct, indirect and supervisory personnel. 10) Study the classification of labour engaged in production and service departments as also the reclassification within the production department into direct (treated as variable) and indirect (treated as fixed) 11) Check the procedure for identification ad booking of direct labour. 12) Verify the correctness as to the preparation of pay roll and procedure followed for disbursement of wages to the workers.

13) Check the incentive scheme, if any, in operation. 14) Examine the system followed for recruitment and payment of casual labour. 15) Check whether the pay roll shows separately the wages for time-rated and piece-rated workers categorizing under permanent, temporary and casual worker. 16) Check the amount of previous year\s and deferred payment, if any, and their treatment in cost accounting records. 17) Check the procedure followed for booking of labour to capital jobs and ensure that labour used for capital work, if any, is excluded from revenue expenditure. 18) Examine the procedure followed for authorization of overtime work and accuracy of the rates applied for preparing overtime bill. 19) Check the reasons for abnormal idle time and overtime work. 20) Check the treatment of variances where standard costing system is followed. 21) Check the correctness of the analysis of wages and salaries into direct labour costs, indirect labour costs, wages and salaries allocated to service cost centres / production / process centres/ administration overheads, selling and distribution overheads etc. 22) Ensure that payment of annual bonus and gratuity are not included in wages and salaries in cost account records. 23) Reconcile salaries and wages of different departments with the total salaries and wages booked in the financial books of accounts. 24) Check the amount of salaries and perquisite of Directors and Chief Executive. 25) Check the number of total man-days of direct labour available and actually worked for the year. 26) Check the average number of workers employed for the year. 27) In case of seasonal industries like sugar, it shall be checked that wages are shown separately for the season and off-season periods.
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COST AUDIT PROGRAMME Overheads WORKING PAPER (W/P) REFERENCE INITIALS DATES
AUDIT STEPS
1) Examine whether the allocation and apportionment of overheads to cost centres are equitable, and it has been consistently applied. 2) Total overheads relating to production, administration, selling and distribution should be reconciled with the financial accounts. 3) Check the apportionment of head office or common unit expenses to different activities/ production of company, examine if the basis adopted is equitable. 4) Check whether the predetermined factory overhead rates has / have been computed correctly and the methods adopted for adjustment of under/ overapplied overheads are correct. 5) Examine the sanctioned load (Fixed Electrical loads and utilization of energy) and compare the energy consumption with standards and ascertain the reasons for variances. 6) Obtain the trial balance of the organization under audit and prepare a list of items of overhead covering factory, administration, selling and distribution, eliminating those items of expenditure, which are not to be considered in cost as per the record. 7) Examine the correctness of classification of overheads according to cost accounting principles. 8) Examine the basis adopted for primary distribution of overhead to cost centres and secondary distribution from service cost centres to ensure that the basis is reasonable and consistent. 9) Examine that the cost of utilities are not taken doubly i.e. once directly taken as an element of cost and again as overhead. 10) Examine the reasonableness and consistency of the basis of recovery of overhead adopted by the unit, the rate of recovery and overhead charged to production cost centres where predetermined or estimated rates are used. 11) Check the extent of the amount of over or under recovery of overhead and its adjustment for variance to cost. 12) Examine the procedure adopted for segregating overhead into variable and fixed and verify whether variable overhead bear reasonable relationship with the activity or production.

COST AUDIT PROGRAMME Repairs and Maintenance WORKING PAPER (W/P) REFERENCE INITIALS DATES
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AUDIT STEPS
1) Check and verify the expenses incurred on the repairs and maintenance of land and building, plant and machinery, equipments, motor vehicles, staff quarters and colony etc maintained by the company. 2) Check whether any expenditure on repairs and maintenance needs to be capitalized, and if so, whether it has been shown separately. 3) Check the deferred amount of repairs and maintenance incurred in earlier years and written off during the current year. 4) Check the basis of allocation of repairs and maintenance expenditure to different cost centres. 5) Check whether separate records for in-house repairs and maintenance and that through external agencies are being maintained.
COST AUDIT PROGRAMME Fixed Assets and Depreciation AUDIT STEPS WORKING PAPER (W/P) REFERENCE INITIALS DATES
1) Check whether assets registers or records are maintained for each type of assets and whether they show the locations, installation/acquisition dates, economic life, original costs, depreciation expense, accumulated depreciation, written down value and rate of deprecation charged. 2) Verify the method of charging deprecation adopted by the unit. 3) Verify whether deprecation charged to cost accounts are as per the prescribed rules. 4) Check the basis for apportioning depreciation of common assets to various cost centres and see that the basis used is reasonable and consistent. 5) Compare the amount of depreciation considered in financial accounts and depreciation charged in cost accounts. This difference should appear in Reconciliation Statement. 6) Check if the company has revalued the assets its impact is not included in the cost of production. 7) Examine the lease agreement in case the company has taken on lease fixed asset and verify the amount of lease rent paid thereof.

COST AUDIT PROGRAMME Utilization of Equipment AUDIT STEPS WORKING PAPER (W/P) REFERENCE INITIALS DATES
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1) Examine the system of recording the utilization of different segments of the plan. 2) Compare the total hours utilized with the available time as per working shifts from the logbook. 3) Compare actual production with rated capacity of the plant.
COST AUDIT PROGRAMME Inventory WORKING PAPER (W/P) REFERENCE INITIALS DATES
AUDIT STEPS
1) Ensure the finished stocks and work-in-progress are physically verified in their respective stages. 2) Examine the system of physical verification in vogue and ascertain whether all important items of raw materials, process materials, packing materials, stores and spares and finished goods, etc are verified at least once during the accounting year and that shortages/ surpluses are properly investigated and adjusted, and treatment shown in cost records. 3) Examine value of non-moving items of stock, their percentage, in respect of direct material, indirect material, work-in-progress, finished goods etc. 4) Obtain the list of closing stocks of important materials by quantity and value at the end of the financial year and calculate how many months requirements are held in stock and ascertain the reasons for abnormal stock holdings. 5) Examine the procedure and amount of written off stock in respect of direct materials, indirect materials, work-in-progress and finished goods during the year and ascertain the causes for write-off and action taken for recovery of realisable value / residual value of the items written off. 6) Check the correctness of the valuation of closing stock of work-inprogress with reference to different stages of manufacture, other materials (imported and indigenous), self manufactured. 7) Verify that there is no change in the method of Valuation from period to period.

8) Examine and verify the valuation of scrap/ wastages and the treatment of income generated from sale of scrap / wastages etc during the year. 9) Examine and verify the difference between the valuation of inventory as per the financial accounts and cost accounts.
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COST AUDIT PROGRAMME Research and Development WORKING PAPER (W/P) REFERENCE INITIALS DATES
AUDIT STEPS
1) Check whether the unit under audit is a recognized R&D unit. 2) Verify the records maintained on R&D showing details of R&D work undertaken and their costs. 3) Verify the procedure of classifying the R&D expenses into process development and improvement, existing product development charging expenses to the cost of products. 4) Examine the amount paid to related parties, if any, under this head.
COST AUDIT PROGRAMME Sales of the Products WORKING PAPER (W/P) REFERENCE INITIALS DATES
AUDIT STEPS
1) Examine the system of preparation of sales invoices and recording of sales figures in accounts. 2) Examine whether sales figures both in quantity and value for each type of product is available by direct tabulation of invoices. 3) Verify the domestic and export sales of the product. 4) Verify whether separate cost statements are maintained for export products. 5) Verify the quantities exported, the countries to which exported, the FOB value of export, and net sales realization per unit. 6) Examine that the basis of allocation and apportionment of expenses are in uniformity with the home products. 7) Ensure that the value of export incentives, are shown separately in the cost statement.

COST AUDIT PROGRAMME Margin Per Unit of Output AUDIT STEPS WORKING PAPER (W/P) REFERENCE INITIALS DATES
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1) Verify the margin per unit of output on domestic sale and export with reference to cost statements. 2) If sale is made under group of product, check and verify the margin per unit of output of all the major group of products. 3) In case of significant variation in the margin compared to previous year, the reasons for the same be ascertained and recorded.
COST AUDIT PROGRAMME Capitalization of Revenue Expenditure AUDIT STEPS WORKING PAPER (W/P) REFERENCE INITIALS DATES
1) Scrutinize the figures given under this para with reference to details given in financial accounts. 2) Verify whether share of overhead as applicable has been allocated. 3) Verify the amount of capitalization under various heads in the fixed asset register such as building, plant and machinery/ equipment manufactures etc. 4) Verify the amount of excise duty paid and capitalized.
COST AUDIT PROGRAMME Packing AUDIT STEPS WORKING PAPER (W/P) REFERENCE INITIALS DATES
1) Verify the cost of own manufactured packing material and the cost of those purchased from the outside parties. 2) Investigate if cost of packing material manufactured by the company is higher than the cost of packing material obtained from the market. 3) Examine the yield and ratios of its scraps. 4) Study the method of allocating packing expenditure to different products. 5) Study the method of treatment of the cot of damaged packing material. Compare the current damaged packing material cost with standard or with past years actual. 6) Study the procedure followed for disposed of scrap materials.

Annexure C CHECK LIST -VEGETABLE GHEE AND COOKING OIL INDUSTRY BASIC DATA Information Required: Plant Capacity (Installed and Utilized) Process Layout Organization Chart. Balance Sheet & Accounts with Trial Balance for Current Year & Last Year. Stock Statements as of year-end. Consumption Statement (Qty. & Value) (Opening Stock + Receipts = Total Less Closing Stock = Net Consumption) Raw Material & Chemicals, Packing Material and Consumable Stores Utility Consumption (Qty. & Value Month wise with units consumed) (Electricity, Steam, Water, Fuel) Consumption Norms Production Statements Oil Blend - Cotton Seed Oil (%) - Soyabean Oil (%) - RBD Palm Oil (%) - Sunflower Oil (%) - Canolla Oil (%) - Any other Oil (%) TOTAL INPUT (100%) NET OUTPUT (%)
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Process Loss: - Visible Loss (actual quantity) (at realizable value credited to cost of oil) - Invisible Loss (quantity only)
Production Statement (Packed wise) Vegetable Ghee (Packed Tins) - 16 Kg Packed - 5 Kg Packed - 2.5 Kg Packed Cooking Oil (Packed Tins) - 17 Litre Packed - 5 Litre Packed - 2.5 Litre Packed Margarine (Packed wise) - Bakery Margarine - Table Margarine By Product - Laundry Soap - Oxygen or Carbon dioxide Gas - Glycerene - Filter Cake

Employee strength / Salaries & Wages (Department-wise) Cost of Steam generated and consumed Cost of Electric Power generated and consumed Cost of chilling Cost of tin manufactured and consumed Cost of chemicals consumed Basic Raw Material Prices Selling Prices (Packed wise) Process-wise Cost Statements
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Statement of Sales (Packed wise) (Qty. & Value) Vegetable Ghee (Packed Tins) - 16 Kg Packed - 5 Kg Packed - 2.5 Kg Packed Cooking Oil (Packed Tins) - 17 Litre Packed - 5 Litre Packed - 2.5 Litre Packed
Margarine (Packed wise) - Bakery Margarine - Table Margarine - By Product - Laundry Soap - Oxygen or Carbon dioxide Gas - Glayserine - Filter Cake TOTAL SALES (Tonnes) Gross Sales- Rupees000 Less Sales Tax Rupees 000 Trade Discount / Commission Rupees 000 Proportion of closing inventory of stores representing items, which have not moved for over twenty-four months. Summary of Sales as per Sales Tax record.
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CHECK LIST CEMENT INDUSTRY BASIC DATA Information Required: Plant Capacity (Installed and Utilized) Process Layout Organization Chart Balance Sheet & Accounts with Trial Balance for Current Year & Last Year Stock Statements as of year end Consumption Statement (Qty & Value) (Opening Stock + Receipts = Total Less Closing Stock = Net Consumption) Raw Material & Chemical Packing Material and Consumable Spares Utility Consumption (Qty & Value Month-wise with units consumed) Electricity, Steam, Water, Fuel Consumption Norms Production Statements Cement Ordinary Portland Cement Sulphate Resistance Cement Portland Blast Furnace Cement - White Cement Clinker - Clinker Ordinary Portland Cement - Clinker Sulphate Resistance Cement - Clinker Portland Blast Furnace Cement - Clinker - White Employee Strength / Salaries & wages (Department-wise) Cost of Steam/compressed air generated and consumed Cost of Electric Power generated and consumed Cost of transportation of raw materials from quarry Cost of crushing Cost of packing and storage Basic raw Material Prices Selling Prices Process-wise Cost Statements Statement of Sales (Qty & Value) Ordinary Portland Cement Sulphate Resistance Cement - Portland Blast Furnace Cement - White Cement TOTAL SALES (Tonnes) Gross Sales- Rupees000 Less: Sales Tax Rupees 000 Trade Discount / Commission Rupees 000 Proportion of closing inventory of stores representing items, which have not moved for over twenty four months.
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CHECK LIST SUGAR INDUSTRY BASIC DATA Information Required: Plant Capacity (Installed and Utilized) Process Layout Organisation Chart Balance Sheet & Accounts with Trial Balance for Current Year & Last Year Stock Statements as of year end. consumption Statement (Qty & Value) (Opening Stock + Receipts = Total Less Closing Stock = Net Consumption) Raw Material & Chemical Packing Material and Consumable Spares Utility Consumption (Qty & Value Month-wise with units consumed) (Electricity , Steam, Water, Fuel) Consumption Norms Production Statements - Sugar Cane crushed & Juice Produced - Gurr melted - Raw Sugar processed - Sugar imported By -Product - Molasses - Baggase - Filter Cake Employee Strength / Salaries & wages (Department-wise) Cost of Sugarcane Purchased/Produced Cost of Beet consumed (if any) Cost of Process Materials/Chemicals consumed Cost of Steam generated and consumed Cost of Electric Power generated and consumed Basic Raw Material Prices Selling Prices Process-wise Cost Statements Statement of Sales (Qty & Value) (i) Sugar (ii) Molasses (iii) Baggase Sales (Tonnes) Gross Sales - Rupees 000 Less: Sales Tax Trade Discount / Commission Rupees 000 Proportion of closing inventory of stores representing items, which have not moved for over twenty four months. Statements under Rule 4(1)(a) and (b) of Companies (Audit of Cost Accounts), Rules, 1998 (Capacity Utilization and Closing Stocks) RT 4 (excise) Report
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PROCESS FLOW CHART - VANASPATI BLEACHING CHEMICALS
OIL TANKS
NREUTRALIZER
FILTER PRESS
HYDROGEN CYLINDER
HYDROGENATION
BLEACHING
NREUTRALIZER
FILTER PRESS
FILTER PRESS
DEODORIZER
HDROGENATED OIL TANKS
BOX TO BE FILLED TO EXPLAIN THE PROCESS
VITAMINS
REFRIGERATION
PACKING
OILS BLENDING TANKS
VANASPATI GODOWN
DESPACTCHING VANASPATI
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CHAPTER V
Manufacturing Processes of Vegetable Ghee, Cement and Sugar Industries

Production Processes This chapter basically deals with the manufacturing process of cement, sugar, vegetable ghee and cooking oil. Its main aim is to provide awareness to the Cost auditor with the technical knowledge of the production process of the above three products. This will enable the Cost auditor to conduct cost audit more effectively. The Production Flow Charts of cement, sugar & vegetable ghee/ cooking oil are annexed to this write-up. (1) Manufacturing Process of Cement Portland cement has great demand in Pakistan due to its major usage in construction work. The demand of other varieties of cement is insignificant and as such they are produced in lesser quantities. In order to produce Portland cement Calcareous and argillaceous materials are used. Calcareous is combinations of four types of materials such as lime stone, chalk, marl, marine shells and alkali wastes where as clay and shale form the argillaceous materials. Certain other materials like bauxite; laterite and iron ore are also used as correcting materials in small proportions. The process consists of grinding limestone along with other argillaceous material to form a suitable raw mix. This raw mix is blended by means of compressed air in R.C.C. Silos. A uniform raw-mix is passed through a four-stage suspension preheater and through a rotary kiln where calcining and sintering takes place to form cement clinker. The clinker discharged from the kiln is cooled in a clinker grate cooler. The cooled clinker is ground along with a fixed proportion of gypsum in the cement mill to give cement. The cement is stored in storage silos from where it is packed and dispatched by rail or trucks. The above processes are described in detail in the following paragraphs. Sources of Raw Materials The procurement of raw materials are either from own sources or other sources. When the raw materials are from own sources, quarrying, digging or dredging operations will have to be carried out according to their nature and then the raw materials transported to the cement factory. The nature of manufacturing operations after the receipt of raw materials into the factory may be briefly described as follows: i. ii. iii. iv. Crushing, pulverising, proportioning and grinding the raw materials i.e., preparation of raw materials. Calcining and heating to a state of incipient fusion the raw materials mix in a rotary kiln, i.e., manufacturing clinker. Cooling and grinding the clinker with the addition of a small percentage of gypsumi.e., processing into cement. Packing and dispatching the cement.
Preparation of Raw Materials: Two processes are generally employed in the preparation of raw materials of Portland cement, viz., the dry process and the wet process. Fine grinding of raw materials is possible only if they are practically dry or contain substantial quantities of water. The choice of the process is determined on the following factors:i. ii. iii. Availability and cost of fuel for burning clinker. Cost of power for grinding. Availability of water for processing.

Crushing and Drying: The quarry products are first crushed in jaw or gyratory crushers and passed through secondary pulverisers like hammer mill or crushing rolls. After secondary crushing they are stored to be taken when needed. The raw materials may be dried first and then mixed or may be mixed and then dried, drying taking place during the preliminary grinding utilizing the heat generated in the grinding process augmented if necessary by waste heat from kiln or from separate heating units. Grinding: Then the raw materials are ground into fine powder usually in two stages, the first preliminary grinding reducing the particle sizes to about 20 mesh finesses and the finishing mills completing the reduction to 200 mesh fineness. Ball mills are used for preliminary grinding and tube mills for finishing. The grinding media in these mills are forged steel balls of diameters suited to the size of ground materials being produced. These balls wear out and their replacement is an item of expenses. Raw materials could also be ground in a single stage utilizing compartmental tube mills. After final grinding the raw materials are sorted in bins or silos from where they are moved as required, to the kiln feeder. Blending silos are also used to facilitate the exact proportioning of the raw materials. Dust collected from kiln gases can again be used along with the raw materials. Wet Process: This process is advantageous when one or more of the raw materials contain substantial quantities of water or where low-grade raw materials can be used in a floatation process. Preparation for Grinding: In using dry materials such as limestones and shales the materials are crushed as in the dry process. But before grinding, water is added to the extent 35 to 40% of the combined weight. If one of the raw materials (e.g. clay) contains considerable moisture, its water content is increased so that the clay slip (i.e., clay in water suspension) is added in the correct proportion to the crushed rock as it enters the preliminary mills for being ground. Where both raw materials contain considerable water, required quantity of water is added to bring the water content up to 35 to 40% before grinding. Grinding: The wet materials mix is ground in mill similar to that used in dry process. Wet grinding is more efficient than dry grinding but the maintenance of the equipment is more expensive. Sometimes it may happen that the mix contains more water than is required for good grinding. The high water content is reduced by a thickening process in large shallow tanks. Centrifugal equipment is used to classify and separate solids from the water. Blending: Slurry is pumped into the blending tanks where it is blended to produce the final kiln feed of correct composition. Slurry blending is comparatively simple and this is one of the advantages of wet process. Before feeding the slurry to the kiln possibly entire water is removed by means of rotary vacuum filter in order to reduce the amount of heat required in the kiln. PRODUCTION OF CLINKER The Kiln: In the kiln chemical changes are made in the raw materials so that the compound composition of the clinker may become quite different from that of the raw materials. The kiln size is the determinant of the plant capacity. The rotary type kiln is commonly used even though vertical kilns are used for smaller capacities. The modern rotary kiln is a long cylindrical steel shell 2 to 3 meters in diameter and from 25 to 200 meters long. The diameter is not
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necessarily uniform throughout the length. The steel shell is lined with refractory materials. The kiln is set at an angle with the horizontal and rotates on its axis at a slow speed. The speed and the inclination govern the rate at which materials pass along the kiln. Kiln Fuel: Fuel burned is an important item in a cement plant. Pulverized bituminous coal is generally used, but oil and natural gas are also used. Coal must be dried and finely ground. It is customary to have individual coal grinding mill for each kiln. In the wet process about 10 to 25% more fuel than the dry process may normally be required. Kiln Feed: Dry raw material mix is fed into the kiln by means of a short screw conveyor through an inclined pipe or by a table type-feeding device. Wet raw materials are fed by means of bucket wheels that dip into the slurry and feed it into the kiln. Clinkering: The raw materials pass through three stages in the kiln. In the first zone, moisture is removed and naturally more heat is required here in the case of wet mix than with the dry mix. In the second zone, calcinations takes place. In the third zone, which is the hottest place, the calcined mix is raised to sintering temperature where clinker is formed. In the dry process kiln temperature ranges from about 760 to 980 C at the feed end to about 1400 to 1600C at the hottest point. In the wet process more use is made of the hot kiln gases and the temperature at feed end is usually around 200 to 350C. Clinker Cooling: As soon as the clinker leaves the kiln, it will have to be cooled. It is usually passed over vibrating screens of perforated plates through which air is drawn. The rate of cooling of clinker is important because it affects the grindability of the clinker. Cooled clinker is stored in bins from where it is taken for grinding as and when needed. Clinker Processing: Clinker particles, especially in the case of dry process, may require crushing in order to make them of suitable size for being ground as cement. After crushing and before the clinker particles are fed into the grinding mills gypsum is added to the clinker. Gypsum is mixed to control the setting quality of cement produced and hence is called the retarder. The quantity of gypsum to be added is determined by laboratory tests of setting time for each sample of cement drawn. The normal quantity of gypsum added is about 2 to 5% of the weight of clinker. The gypsum particles should be more or less of the same size as that of the clinker in order to facilitate proper grinding. Grinding: Preliminary grinding of clinker is done in ball mills or ring mills as in the case of raw materials in the dry process and for finishing grinding tube mills are used. It is necessary that the particles should be finely ground and the particle sizes suitably graded. Storage: After finish grinding, cement is sent to storage bins from where it is packed either in paper bags by means of automatic bag filling machines. The cement in bags is then dispatched by railway wagons which come into the packing bay by means of special siding or by trucks.
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(2) Manufacturing Process of Sugar There are two types of processes, which are generally employed in the running of the sugar factory: a) Double sulphitation process; b) Double carbonation and double sulphitation process These two suphitation and carbonation processes are clarification process. Different equipment is needed in clarification section while all other stations will have the same equipment. Sugar factory consists of the following five main stations: i. ii. iii. iv. v. Mill House Boiler House Power House Clarification and Evaporation House Boiling and Curing House
Mill House: It is the cane-crushing unit, which consists of cane carrier, cane cutter and cutting knives, milling tandem (4 to 6 mills of 3 rollers each) bagasses carrier and conveyor. The sugar factory of 1250 tonnes crushing capacity per day has only four mills of 30 X 60 size rollers. There are 3 rollers in each mill. Cane feeding to the cane carrier is being done either manually or by mechanical unloading cranes. As the cane carrier moves, the Cane Kicker even out the load in the cane carrier and then two sets of cane knives cut them into small pieces. This process of cane cutting is called cane preparation. These cane pieces, then, pass through different mills and the juice is extracted. The mills are run by steam turbines, which are driven by the high pressure steam generated by the boilers. Boiler House: There are about two or three boilers in a sugar factory, which generate steam by burning of bagasse. The steam is used in mill house for running mill turbine, powerhouse, boiling house, curing house etc. In a sugar factory of 1250 tonnes crushing capacity, two boilers of 20 tonnes per hour steam generation each are used. The steam required by the Sulphitation process varies from the 55 per cent to 70 per cent of the cane crushed per hour. The steam that is generated in the Boiler is used directly by the Mills where the heat energy is converted to mechanical energy and the exhaust steam is taken to the process. It is only in the Turbo Alternators installed in the Power House that the heat energy of steam is converted to Electrical energy and the exhaust from this as well as the exhaust from the Mill Turbines are combined and used in the Boiling House for heating and boiling the juice. Power House: The major portion of the steam generated by the boilers is utilized for producing power by the Turbo-alternators. This power is sufficient for the running of different electrical units of a sugar factory. Steam after converting its energy to electrical energy comes out from Turbo-alternators as exhaust steam. This exhaust steam is utilized in heating and boiling the juice. Clarification and boiling house: Juice heaters and evaporators: The juice extracted by the mills is weighed by juice weighing scale and thereafter is heated by juice heaters to final juice temperature of 100C in different temperature stages depending upon the clarification process. Juice is heated in juice heaters by the exhaust steam coming out of the Turbo-alternators and Mills turbines, and by the steam vapours blend from the first body of the evaporators, clarification is carried out in the following two ways:
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1) Sulphitation: Juice is first heated to a temperature of 65C and then required lime and sulphur di-oxide gas is added to it. The juice, thereafter, is heated to a temperature of 100C and is then, passed through clarifier. The mud juice from the clarifier is passed through vacuum filter wherein mud is taken outside the factory as waste and clarified juice from vacuum filter and clarifier is taken to evaporator for evaporating its water content. 2) Carbonation: Juice is heated in three stages, i.e., form 30 to 55C, 50 to 75C 70C to 100C by exhaust steam and steam vapours. After heating to a temperature of 55C, juice is first carbonated in first carbonation tanks, where carbon dioxide and required lime is added. The juice is clarified by first filter presses and is then passed to second carbonation tanks. After that, juice is heated to a temperature of 75C and is passed through second filter presses. Second carbonated filtered juice is sulphited by adding required sulphur di-oxide and is heated from 70 to 100C and is then taken to evaporators. The evaporators set consists of four bodies. Fourth body is kept under 25 vacuums. First body is heated by exhaust steam, however, other bodies by the vapours of the previous body. The evaporation being done by both the exhaust steam and vapours. The percentage of evaporation being (60-15)/60 per cent i.e. 75 per cent. The juice after evaporation is termed as syrup. This syrup is normally of 60 brix, i.e. total solids in the syrup are 60% of its total weight. The syrup is then sulphited in syrup sulphitation tank. Boiling House and Curing House: Sulphited syrup is kept at the pan floor in the storage tanks. There are four pans of 45 tonnes capacity each in the sugar factory of 1250 tonnes crushing capacity. The syrup in these pans is boiled under vacuum. Three massecuite boiling system is normally adopted, in which, A, B and C massecuites are formed. A massecuite is formed by boiling syrup on footing of B-single cured sugar seed. This A-massequite is poured into crystallizers and then from crystallizers, it is taken to A-fore worker centrifugal machines for curing where A-heavy massecuite and A-single cured sugar is separately obtained. A-magma is made from A-single cured sugar and then it is again cured in A-after worker machines. A double cured sugar is bagged. A-light molasses are pumped to pan floor and are used for making A-massecuite. A-heavy molasses are pumped to pan floor wherein these are used in making B-massecuite in B-pans. B-massecuite is poured into B-crystallizers and is then cured in B-centrifugal machines. B-heavy molasses and B-singles cured sugar are separately obtained. B-single cured is used for seed. B-heavy molasses are pumped to pan floor and are used in making C-massecuite in C-pans. C-massecuite is poured into C-crystallizers where it is cooled for about 2024 hours. From C-crystallizers C-massecuite is taken to C-fore worker centrifugal machines for curing. Final molasses and C-single cured sugar are obtained. C-double cured sugar is melted and is used in making Amassecuite. C-light molasses are taken to pan floor and are used in making C-massecuite. Bagging House: A-After-worker or A & B After-worker discharge the sugar on to a grass hopper conveyor and by letting in hot air, the sugar is dried and next taken to a grader where the different grades are separated and bagged as per grain size. By-Products of a Sugar Factory: The three principal by-products of a sugar industry are bagasses, molasses and press cake. These three by-products alone constitute about 40% of the weight of the total cane crushed, Bagasses itself accounts for about one-third of the weight of the cane crushed. Proper and economic utilisation of these by-products can reduce the cost of production of sugar to some extent.
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(3) Manufacturing Process of Vegetable Ghee/Edible Oil There are different types of raw oils, which are further processed for manufacturing vegetable ghee/edible oils. Some of these oils are generally imported from abroad and some of them are locally made available for consumptions. These oils are indicated below: a) Imported Palm oil, Soya bean oil. b) Local Cotton seed oil, Rapeseed oil, Sunflower oil The following main processes are employed in the manufacture of vegetable ghee/edible oil: i) ii ) iii) iv) v) Pre-refining Hydorgenation Post-refining Deodorisation Packing
i) Pre-refining The raw oils for in manufacturing of vegetable ghee/edible oil are first subjected to pre-refining. The objective underlying this treatment is to remove the objectionable slime, dirt, free fatty acids and colour which are present in the raw oils. Pre-refining consists of alkali neutralisation followed by bleaching. For neutralisation caustic soda is the alkali, which is most widely used. The commonly used batch neutralization process is carried out in vessels specially designed for the purpose, in which raw oil is treated with a solution of caustic soda. The amount and strength of caustic soda used depends on the quality of oil and its contents of free fatty acids. The caustic soda combines with the free fatty acids present in the oil and settles at the bottom of the vessels as soap stock. The soap stock while settling down carries with it some of the other impurities present in the oil. The soap stock is then drained off from the vessels and in most cases treated in separate wooden vats with sulphuric acid, producing acid oil. This acid oil which is a by-product in the neutralization process is commonly used in soap-making. After removal of the soap stock from the neutralising vessels, the oil, is washed free for soap by hot water. In some plants, the neutralisation step is carried out as a continuous process involving continuous mixing of the oil with metered amount of caustic in a mixer followed by the separation of oil and soap in a battery of centrifuges. The separated oil is subsequently washed continuously with hot water. The mixture of oil and water is then separated in another set of centrifuges. In the neutralisation process while the free fatty acids and other impurities are removed, some loss of neutral oil in the soap stock is unavoidable due to saponification by excess caustic which has necessarily to be used and by entrainment in soap-stock. This loss of neutral oil varies with the quality of the oil. The neutralised oil is dried under vacuum and bleached to remove most of the colouring matter present in the oil. This is done in bleaching vessels by treatment of the oil with activated bleaching earth. In some plants, a common vessels is used for neutralising and bleaching. After bleaching, the oil is filtered over filter presses for removal of bleaching earth. ii) Hydrogenation The neutralised bleached oil is then subjected to hydrogenation. During this process, hydrogen is added at the double bends in the oil molecule, thereby reducing the degree of unsaturation and increasing the melting point of the oil. The presence of a catalyst is required to carry out this reaction, the catalyst normally used being nickel catalyst. The oil mixed with the necessary amount of nickel catalyst is heated in Autoclaves or hydrogenation vessels and treated with hydrogen. When hydrogenation has proceeded to the necessary extent, the process is stopped. The hydrogenated oil is filtered over filter presses for removal of nickel catalyst.

iii) Post-refining There is a slight increase in the free fatty acid content of the oil during the process of hydrogenation. In order to remove these and the traces of nickel, which may be present in the hydrogenated oil, the hydrogenated oil is again neutralised and bleached. The process is called post-refining and is analogous to the neutralisation and bleaching process described under pre-refining. However, the caustic employed is less and more dilute and the bleaching earth usage is lower. After neutralising and bleaching, the oil is filtered again for removing the bleaching earth. iv) Deodorization The purpose of deodorization is to remove odorous substances from the oil. The post-refined oil is deodorized in vessels specially designed for the purpose by treatment with a current of steam under vacuum before being emptied from the deodorizer. The various oil components used in Vanaspati are either blended in the required proportion after this final stage of deodorization or the hardened oils along with the soft (unhardened) oils are blended before the post-refining stage. v) Packing The Vanaspati oil blend is enriched with Vitamins A and D before being packed into containers. Vanaspati is produced either with a granulated texture resembling ghee or as a smooth grainless product. For the granulated product, the vitaminised oil blend is filled hot (at a temperature of around 50C) into containers and the filled containers are cooled gradually in cooling rooms. The grainless product is made by rapid cooling of the blend (either over chilling rolls or by continuous chilling in closed tubes) before being filled into containers.
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CHAPTER VI
Performing Cost Audit Background Knowledge and Audit Procedures

1.1. Knowledge of the industry and the entity: Before performing cost audit, the cost auditor must have or obtain knowledge of the industry and its business environments, sufficient to enable him, to identify and understand the events, transactions and practices that in the Cost Auditors judgement may have a significant effect on the cost accounting statements of the entity to be audited, or on the cost audit report. The cost auditor should also have a general knowledge of the countrys economy and the industry within which the entity operates. He should also have a clear understanding of the conditions that affect or may be affecting the cost and profit performance of the entity. 1.2 Updating of knowledge of industry
The knowledge that the cost auditor obtains about the industry and the entity at the planning stage of the cost audit keeps increasing and updating, while taking up the assignment and at every stage throughout the performance of cost audit. The cost auditor keeps re-evaluating the knowledge and information gathered earlier. Knowledge of the industry, which the cost auditor may already have, may be updated through discussions with the entitys senior operating personnel, publications relating to the industry, government surveys, statistics, trade journals, visit to the entitys premises and plant facilities. Knowledge of the industry and the entity is extremely important in cost performance evaluation. The cost auditor should ensure that the assistants assigned to a cost audit engagement also obtain sufficient knowledge of the business to enable them to carry out the cost audit work delegated to them. It should be ensured that they understand the need to be alert for additional information and the need to share that information with the principal and other assistants. 1.3 Legal and Regulatory Framework:
When planning and performing cost audit procedures, the cost auditor should keep in view the legal and regulatory framework within which the entity has to operate. Although it is the responsibility of the management to ensure that the entitys operations are conducted in accordance with the laws and regulations and the cost auditor cannot be held responsible for non-compliance by the entity; he should see that the provisions of the Companies Ordinance 1984, the relevant cost accounting record order and of the Companies (Audit of Cost Accountings) Rules 1998 as far as they relate to the maintenance of cost accounting records and providing of cost accounting information, are duly observed and followed by the entity. Non-compliance of such provisions by the entity would have a material effect on the cost accounting statements, in which case the cost auditor is specifically required to report whether or not the entity complies with the provisions of laws or regulations which are directly related to cost audit. 2. Organisational Set-up:
While taking up any new cost audit assignment, the cost auditor should, first of all, study the organisational set-up of the entity. He should get familiar with the administrative, financial, buying and selling, production and planning functions at the entity. He should be introduced to the functional heads, as he will be dealing with them during the course of cost audit. Each function and sub-function should be organised in a logical manner, according to its nature and size. The size of and the manner in which the various functions are organised have a direct bearing on the cost of each function performed at the entity. The cost auditor will do well in discussing the functional set-up with the top management, pass on the concept of activity-based costing and also offer comments on the set-up, if considered

necessary, under the circumstances. Knowledge of the organisational set-ups of each function helps in obtaining knowledge of the industry and the entity, referred to in the foregoing paragraphs. The cost auditor has also to verify and express opinion on the company representations made under the Companies (Audit of Cost Accounts) Rules 1998, and on the cost accounting information provided by the company, in the Schedules and Annexures prescribed in the cost accounting records rules applicable. He has also to evaluate and offer comments on the entitys cost accounting system. He thus has to work, maintaining close liaison with the functional heads and with various levels of management. 3. Company Representations:
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Under clauses (a) and (b) of sub-rule (1) of Rule 4 of the Companies (Audit of Cost Accounts) Rules 1998 every company shall, in addition to the records and statements specified in the order of the Securities and Exchange Commission of Pakistan, issued under clause (e) of sub-section (1) of Section 230 of the Companies Ordinance 1984, prepare: (a) (b) a statement of productions capacity of the plant, in terms of machine hours and production units, the actual utilisation of the capacity and the reasons of difference between the two; and a stock-in-trade of the company as at the end of financial year in terms of quantity and cost thereof, distinguishing between: i ii iii iv stock of raw material and components; stock of work-in-process; stock of finished goods; and other stocks.
Under sub-rule 2 of Rule 4 of the Cost Audit Rules, (2) the statements specified in clauses (a) and (b) of subrule (1) shall be signed by the chief executive and chief accountant of the company. Both the statements specified in clauses (a) and (b) shall be submitted along with the Cost Auditors report. Capacity as explained in para (1) of Appendix III of the Rules: 1. Capacity: (a) Licensed, installed and utilised capacities of the factory or factories for the product under reference. (b) If the company is engaged in other activities besides the manufacture of the product under reference, give a brief note on the nature of such other activities. Production:
4.
After checking the stock-in-process at the end of the financial year with the production records and after adjusting the opening stock-in-process or last years closing stock-in-process, production in quantities of each type of product under reference should be worked out, as required in para 3(a) of Appendix III (sub-rule (3) of Rule 4) of the Companies (Audit of Cost Accounts) Rules 1998. The percentage of production of the product under reference should be seen in relation to the installed capacity. If there is any shortfall in production as compared to the installed capacity, brief comments as to the reasons for the shortfall, shall be offered in the cost auditors report. While laying down particulars to be included in cost auditors report to the Directors of the Company, para 3(c) of Appendix III to the Companies (Audit of Cost Accounts), Rules 1998, further provides that if there is any addition to the production capacity during the year under review or in the immediately preceding two years, this may also be mentioned.

5.1. Gathering Cost Audit Evidence:
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The cost auditor has to follow the International Audit Standards (IASs) and related technical pronouncements issued by International Federation of Accountants. Cost audit, like any other audit, involves: (a) planning (b) carrying out audit procedures or gathering cost audit evidence and (c) drawing reasonable conclusions on which to base the audit opinion. The principles and planning have generally been explained in Chapter III and IV of this Handbook, respectively. During the course of audit, the cost auditor should obtain sufficient appropriate audit evidence for arriving at reasonable conclusions. Audit evidence is the documented information obtained by the cost auditor in arriving at the conclusions, on which the audit opinion is based. Audit evidence will consist of source documents, cost accounting records, cost accounting statements, company representations and corroborating information from other sources. Cost audit procedures mean tests to obtain cost audit evidence to detect material misstatements in the statements and in the information provided by the entity. The tests may be performed on the details of transactions and balances, following analytical procedures. When obtaining cost audit evidence from substantive procedures, the cost auditor should consider the sufficiency and appropriateness of audit evidence from such procedures, together with any evidence from tests of control to support the cost and other information asserted by the management of the entity. If unable to obtain sufficient appropriate cost audit evidence, however, the cost auditor should express a qualified opinion or a disclaimer of opinion. 5.2 How Cost Audit Evidence is obtained?
Cost audit evidence is obtained by following procedures such as: inspection, observation, inquiry and confirmation, computation and analytical procedures noted below: (i) Inspection consists of examining records, documents, or tangible assets. Inspection of records and documents provide cost audit evidence of varying degrees of reliability, depending on their nature and source and the effectiveness of internal control over their processing. Documentary cost audit evidences may be created by third parties and held by third parties or held by the entity or created by the entity and held by the entity. The cost auditor may observe the procedures being performed, say the counting of inventories by the entitys personnel. Inquiry consists of seeking information from knowledgeable persons inside or outside the entity. Inquiries may be written or oral, providing new or corroborative information. Confirmation is the response to an inquiry. Computations consist of checking the arithmetical accuracy of source documents and cost accounting records or of performing independent calculations. Analytical procedures consist of significant ratios and trends, including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts. Analytical procedures include the consideration of comparison of the entitys cost information for prior periods, anticipated results of the entity, such as budgets or forecasts or expectations of the cost auditor, such as an estimation of depreciation. The entitys cost performance may also be compared with similar industry cost information. Analytical procedures also include consideration of relationships among elements of cost information that would be expected to conform to a predictable pattern based on the entitys experience, such as contribution analysis. Relationships also exist between such direct and indirect costs as payroll and employee related costs. Various methods may be used in performing analytical procedures, ranging from simple comparisons to advanced statistical techniques. Choice of procedures, methods and level of application is a matter of professional judgement. The cost auditor should apply analytical procedures, when forming an overall conclusion as to whether the cost statements as a whole are consistent with the auditors knowledge of the business. The conclusions drawn from the results of such procedures are intended to corroborate conclusions formed during the audit of individual components or elements of the cost accounting statements and assist in arriving at the overall conclusion as to the reasonableness of the cost statements. They may also identify areas requiring further procedures. The extent to which analytical procedures may be relied upon would depend on the materiality of the items involved.
(ii)
(iii)
(iv)

(v) Cost audit evidence is obtained from an appropriate mix of tests of control and substantive procedures. The type of tests to be performed is important to an understanding of the application of audit procedures in gathering cost evidence. The cost accounting system is tested to identify the characteristics or attributes that indicate performance of a control, as well as possible deviations and conditions which indicate departures from adequate performance. The cost auditor should perform audit procedures appropriate to the particular test objective on each item selected. The cost auditor should obtain sufficient appropriate audit evidence as to whether the standard cost, planned cost, budget cost or cost estimate, being used for cost accounting and control purposes, is reasonable in the circumstances. An understanding of the procedures and methods, including the cost accounting and cost control, used by the management in making the control yardstick is important for the cost auditor to plan the nature, timing and extent of the cost audit procedures. The cost auditor should either review and test the process used by the management to develop the standard; use an independent standard for comparison with that prepared by the management or review subsequent events which confirm the standard made.
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(vi)
(vii) The cost auditor should make a final assessment of the reasonableness of the standard estimate, based on the auditors knowledge of the business and whether the yardstick is consistent with other audit evidence obtained during the audit. After an evaluation of results of cost audit procedures, the auditor should feel convinced of their being reasonable. Vouching, testing, examining, analysing, comparing, confirming, inspecting, reconciling, tracing, verifying the details, the cost auditor collects audit evidence to form his opinion not only about the production and capacity utilisation, but also on the cost accounting system (Section VII), inventories and the cost accounting statements prepared by the management in accordance with cost accounting records order/rules, applicable to the industry. Cost statements differ from industry to industry and reflect how production and auxiliary services are generally organised. (viii) The cost audit procedures outlined in the foregoing paragraphs are not only performed on the statements submitted by the company under the Companies (Audit of Cost Accounts) Rules 1998, but are also performed on the cost accounting records which the industry has to maintain under the cost accounting records order/rules. The cost accounting records order rules specifically mention the principal elements of cost involved in the production of the relevant product and specify adequate and proper accounting records for the same. The principal elements of cost, generally relevant to various industries, are discussed in the next Chapter.
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CHAPTER VII
Performing Cost Audit Part Two: Important Elements of Cost

1.1 Raw Materials: Raw materials and other materials which can be directly identified with production would normally constitute major part of the cost. The cost of raw materials, both in quantities and value, as given in the statements, should be verified. 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. Withholding income tax and sales tax would be separately accounted for. Raw materials are the materials which directly go into the process of manufacture and physically constitute a part of the product; whereas there may be some direct materials, which are directly identifiable with the production process but only help production. Materials which are relatively of insignificant value viz. material although may be directly conducive to production also classified as indirect material. Data for raw materials consumption have to be provided for the year under audit, as well as for the previous two years, for comparison. 1.2 Material Consumption:
Components and parts in the case of engineering industries are referred to as direct materials. Material consumption would normally refer to material consumed in production. Every cost auditor knows how the figure of material consumption is worked out by deducting closing inventories, from the receipts and adding opening balance. Consumption of materials should be carefully checked with the issues to production processes. The use of the term major raw materials, in para 4 of Appendix III to the Companies (Audit of Cost Accounts) Rules 1998, indicates all direct materials; some of which may be small in quantity and value but large in number, which may not be reported as required in this same para. 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. 1.3 Comparison with Standards or Estimates:
Various clauses of para 4 of Appendix III provide for comparison of the consumption of major raw material with the standard requirement, if any. If standards have not been worked out, there should be estimates on the basis of which management of the entity exercises control. In the absence of an estimate, the cost auditor should arrive at a standard or estimate, on the basis of his knowledge of the industry, as mentioned in this Handbook, earlier. Variances from the standard or estimate and from the figures of the preceding two years, should be looked into and commented upon by the cost auditor in his report. 1.4 Maintenance of raw material quantity and cost:
The relevant cost accounting record rules generally provide the manner in which the record of cost and quantity of raw materials shall be maintained and how the cost is arrived at. The cost of raw materials includes all direct charges upto works, such as freight, inward transport handling, insurance etc. The basis of costing of raw material should be consistently followed, and should be commented upon by the cost auditor. 1.5 Components of Cost of materials:
Cost accounting record orders/rules may provide the manner in which cost of purchases, cost of inspection and receipt should be included in the cost of the raw materials. The cost auditor should examine the procedures being

followed in procuring, planning, purchasing, transporting, receiving, inspecting, that is all procedures and costs involved in making the materials available at the point of the production process. Moreover, realisable value of any waste material or by-product, which may have adjusted the cost of raw materials, be carefully considered and treated in accordance with the normal or standard cost control practice followed by the industry, according to the knowledge the cost auditor may have. 2.1 Wages and Salaries:
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Para 5 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, provides that the following particulars relating to wages and salaries be included in Cost Auditors Report to the Director of the company: (a) total wages and salaries paid for all categories of employees, separately in respect of each of the following namely:-
iiiiiiivvvi vii(b) (c) (d) (e) (f) (g)
direct labour cost on production; indirect employees cost on production; employees cost on administration; employees cost on selling and distribution; bonus to workers and employees; other employees cost, if any (including taxes and levies); and total employees cost (total of items (i) to (iv) above)
Salaries and perquisites of directors and chief executive. Total man-days of direct labour available and actually worked for the year. Average number of workers employed for the year. Direct labour cost per unit of output of the product (give information in respect of each). Brief explanation for variances in item. (e) above, if any, as compared to the previous two years. Comments on the incentive schemes, if any, with particular reference to its contribution towards increasing productivity and its effect on cost of production. Incentive Schemes:
2.2
Provisions of the cost audit rules in regard to the Cost Auditors report quoted in the foregoing para, requires the cost auditor not only to carry out a fairly comprehensive analysis of all wages and salaries paid to all categories of employees, from the Directors and Chief Executive to workers employed for production, administration, selling and distribution, but also to examine any incentive schemes and the contribution such schemes make to achieving more production, higher productivity and their effect on the cost of production. Added marginal cost may be justified to achieve higher production to meet the public demand.

2.3 Comparison with previous years:
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Total man-days of direct labour available and actually worked, during the year, direct labour cost per unit of production; and average number of workers employed for the year, with explanation for the variances in the direct labour cost per unit of production, should be compared with the previous two years, and necessary comments on the comparison included in the Cost Auditors report. Detailed study of employees and employee related costs considerably enlarges the scope of the Cost Auditors report. 3.1 Stores and Spare Parts:
Although para 6 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, refers to stores and spare parts kept in stock by the entity, the expenditure per unit of output on stores etc., referred to in para 6(a), is related to repairs and maintenance. Provisions of the applicable cost accounting recorder orders/rules also refer to consumable stores, the consumption of some or all of which may be identifiable with or chargeable direct to production. The cost auditor should examine and comment upon the system of stores accounting, i.e recording of receipts, issues and balances, both in quantities and values. 3.2 Ageing of Inventory:
Partly to safeguard against any unfavourable change in the import policy, industrial units in Pakistan generally overstock imported stores and spares. The cost auditor, while examining the list of stores and spares, should pay particular attention to the ageing of inventories. He should point out such slow moving items in which there has been no movement over the last twenty four months. 3.3 Inventory valuation formulas:
The various inventory cost formulas (LIFO, FIFO, NIFO), weighted average cost, base stock, specific identification, latest purchase price have different effect on costing and asset valuation. If 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. The record keeping should also be examined, which should be on a perpetual inventory system, indicating quantities and values. Inventories are generally an important item of assets and the corporate auditors of financial statements attend to the physical count of inventories. The cost auditor, who takes up the assignment after the financial audit, should take into account the audited inventory records and balances. 4.1 Power and Energy:
Complete record of costs and quantities of all types of power, fuel and energy such as electricity, compressed air, gas, steam, fuel oil, compressed air and electricity which may be generated/produced by the company itself, by its wholly owned subsidiary or sister concern, or purchased from outside, consumed by the industry, should be available. The cost and quantity consumed for production shall be shown in the relevant annexures, as required under the applicable cost accounting record order/rules. The records shall be so maintained as to enable assessment of consumption of power by different departments or manufacturing units or cost centres on a consistent basis. Allocation of cost shall be on the basis of actual consumption, if separate meters, measurement devices are installed; or on the basis of technical estimates, if separate measurement devices are not installed. 4.2 Cost of Fuel purchased:
Adequate record should be available to ascertain the cost of furnace oil/gas and/or other energy material purchased and charged to various departments/cost centres. If the cost of furnace oil or gas etc is allocated to different departments on basis other than actual cost, reconciliation with the actual cost and the treatment of variances should be indicated in the records. Records of receipts and issues should be so maintained as to clearly show any excess or shortage at the time of stock taking.

4.3 Power and Fuel cost as a percentage of cost:
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The cost auditor should examine the power and fuel cost as a percentage of the total cost. Energy costs have become important, not only because of the rising trend in prices, but because of scarcity of the material. Energy has to be conserved. In case any residuary inputs, such as bagasse in the sugar industry, are used as a source of energy, quantification and evaluation of such inputs should be examined. Both energy consumption and possible conservation should be discussed with the technical staff of the company. Moreover, progress made in implementing any energy conservation plan, indicated by the management in the Directors reports presented in AGMs, should be examined and commented upon in the Cost Auditors report. 5.1. Repairs and Maintenance:
Record of costs incurred on in-house repair and maintenance facility shall be examined and the basis on which the cost is allocated to various departments shall be examined. Some repairs and maintenance may have been carried out by outside contractors. Maintenance policy should be examined from cost benefit point of view. As regards the in-house maintenance facilities, classification of activities for activity based costing ABC may be a part of the maintenance policy. Indirect Material consisting of operating supplies/ consumable stores, as already observed, may be charged direct to production, but such indirect materials as are required for break-down maintenance (stores and spares) and for regular periodical/planned maintenance, shall be allocated on the basis of usage or maintenance service actually provided to various departments. 5.2 Heavy repairs or overhaul cost:
Cost incurred in carrying out major repairs and maintenance may be partly or wholly of capital nature, such as heavy repairs or overhaul costs, the benefit of which is likely to be spread over a period longer than one financial year. This should be separately shown and pointed out. Such expenditure should be treated as deferred revenue or capital expenditure. Repair and maintenance relevant to the current year, and capital or deferred revenue expenditure, the incidence of which is to be spread over a period longer than one financial year, should be properly differentiated. 6.1 Depreciation:
Cost accounting record order/rules require that record of all fixed assets, in respect of which depreciation is to be provided, shall be maintained. Depreciation 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. Any 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. 6.2 Provisions of Companies Ordinance:
Provisions of the Companies Ordinance 1984 in regard to depreciation should be kept in view. Clause F of part III of the Fourth Schedule of the Ordinance: F(i) The amount provided for depreciation, renewals or diminition in the value of fixed assets: (ii) if such provision is not made by means of a charge for depreciation, the method adopted for making such provision shall be disclosed; where such provision is made by means of a charge for depreciation, the value of the assets and the additions or depletions thereto, the depreciation methods and the depreciation rates used for fixed assets under each sub-head of paragraph 1(A) of Part-II of this Schedule shall be disclosed. Where no such provision has been made, the reasons for not making it and the amount of depreciation which should have been provided and the quantum of arrears of depreciation, if any, shall be disclosed.
(iii)
(iv)

7.1 Overheads:
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Overheads is a well defined and well understood term. According to para 8 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, the total amount of overheads should be identified and divided into four categories: factory overheads, administration overheads, selling and distribution overheads and financial charges. Reasons for significant variations in the overheads, compared with the previous two years, have to be given in the cost auditors report. Providing item-wise break-up into factory overheads, administration overheads, selling and distribution overheads and of financial charges would go to make the audit report more meaningful. If not all, significant items may be so analysed. 7.2 Allocation of Overheads:
The basis of allocation/apportionment of overhead cost to cost centres should be in accordance with the accepted principles of cost accounting, quantification of services rendered by service departments to cost centres; or on the basis of activities which are cost drivers.
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CHAPTER VIII
Cost Accounting System and Reconciliation

1.1 Determining Unit Cost: Cost Accounting systems differ from industry to industry. The system under which the data may be processed manually or on a computer would also differ to some extent from company to company, according to the interpretation of the management and cost control requirements of the management of the company. Basically different cost accounting systems are followed for job processing, batch processing and continuous processing industries. Job costing is generally adopted where specific jobs have to be individually costed and completed, like aircraft manufacturing. Batches are processed in industries like pharmaceutical. Textile and cement are examples of continuous process industries. Both in batch costing and continuous process industries, cost per unit in the batch or in the production process run is determined by averaging the total cost of the batch or the production process run over the units produced. 1.2 Cost Control:
Cost accounting is needed both for ascertaining cost of a product or operation, as well as for exercising cost control. However, there should be some benchmark or yardstick against which actual cost can be measured. Such a yardstick may be estimated cost, standard cost, budget cost or activity based cost. Cost auditors are familiar with all such cost measurement and cost control techniques. Standard costing and activity based costing are complete systems. Under the standard costing, standard costs are used instead of actual costs and then variances are analysed and adjusted. Under activity-based costing, costs are ascertained on the basis of activities, which are cost drivers. Financial accounting has been a mandatory requirement ever since corporate laws were framed to regulate corporate business. Cost accounting records, in earlier times and in some cases even now, are maintained in an informal manner in memorandum form, which in small industries meet the basic managerial control requirements. Even when cost data is compiled in memorandum form for providing managerial control information, the cost data is reconciled with financial accounting data. Financial accounting data being subject to mandatory audit, is usually considered more reliable and comprehensive. Units of such industry as are covered by the cost accounting record order/rules, have to maintain proper and adequate cost accounting records, in order to provide cost accounting information in the prescribed schedules and annexures. The cost auditor has to judge and give his opinion on whether or not the cost accounting records maintained are adequate for the cost accounting of important elements of cost, specifically mentioned and explained in the cost accounting record order/rules. 2.1 Cost Accounting System:
Under para 2 of Appendix III to the Companies (Audit of Cost Accounting) Rules 1998, the cost auditor has to offer brief comments on the cost accounting system and its adequacy or otherwise to determine correctly the cost of the product under reference. It is always appropriate to give a brief description of the cost accounting system being followed by the unit under audit, before offering any comments on it. The cost auditor, in his comments, should highlight changes, which may have been made in the cost accounting system, since last year.

2.2 Adequacy of Cost Accounting System:
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Although the rules refer only to the adequacy of the cost accounting system in arriving at the cost of production, it is necessary to examine the adequacy of the system from the angle of arriving at the marketing costs as well. This is necessary in view of the provisions that are generally included in the cost accounting record orders that (1) the cost accounting shall be kept in such a way as to make it possible to calculate from the particulars entered therein, the cost of production and cost of sales of each of the products under reference, during the financial year (see sub-clause 3 of clause 3 of Vegetable Ghee and Cooking Oil Companies (Cost Accounting Records Order 1990). The term cost of production must be taken to include cost of processing activities. For example, when cost accounting record rules are issued to cover an industry like Textile, the textile processing company which processes textile produced by another manufacturer, will also be covered by those record rules. Similarly, some cement manufacturing units may buy Clinker produced by a different cement plant. Both making clinker as well as processing clinker to produce cement are covered by the cost accounting record rules, applicable to the cement industry. In such cases, all processing companies have to get their cost accounts audited by Cost Auditors for the processes involved. 2.3 Requirement of Cost Accounting Record Rules:
It is advisable for the cost auditor to keep the requirements of Schedule 1 of the relevant cost accounting record rules in his files and review the existing cost accounting system being followed by the unit under audit, in the light of that analysis. Important elements of cost, like raw materials, labour, employee related cost, power, fuel, stores and spares, repairs and maintenance, other overheads and depreciation, which are generally specifically mentioned and explained in the cost accounting record order/rules and for which adequate cost accounting records have to be maintained, have been discussed in the preceding two chapters of this Handbook. 2.4 Comment on Cost Accounting System:
While offering comments on the cost accounting system, the cost auditor should keep the following points in mind:a b c the manufacturing process of the unit; control aspects distinct from cost ascertainment; other activities of the organisation in addition to operation relating to product under review with particular reference to the reasonableness of allocation and apportionment of common expenses; joint cost ascertainment and process of assessment; evaluation of component/inputs made by the company using own facilities; standard cost and adjustment of variances; and management information system and how the same is linked to functions, and to financial and cost data collection. Scheme of Cost Centres:
d e f g
2.5
The logical scheme of cost centres should also be examined to see whether or not the scheme provides an appropriately effective cost control. There should be a balance between the cost of controlling procedures and the benefits derived therefrom. Evaluation of this and such other aspects of the cost accounting and control system shall largely depend on the judgement of the cost auditor.

3. Integrated Cost Accounting System:
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With the introduction of electronic data processing, the days of maintaining cost accounting records separately, in memorandum form, are over. Cost accounting records are now also based on the same data from which financial accounts are prepared, even though the data may not be processed by the computer. Such integration is possible by adding a secondary classification in the accounting code, with which all cost and management accountants are familiar. With integrated cost and financial accounting, the cost and financial statements can be more conveniently prepared and reconciled. Expenses which are recorded according to the their nature in financial accounts, are sub-divided through a secondary classification according to various cost centres. Expenditure which has been recorded in financial accounts according to its nature and then classified according to purpose or cost centres, can be identified and reconciled. However, if say salaries and wages appearing in the accounts of various cost centres do not add up to the total amount shown in the financial accounts, entries in the financial account which have not so been subdivided will have to be separately marked and suitably commented upon. 4. Reconciliation with Financial Accounts:
After the financial or corporate auditor submits his report for the year, the cost auditor shall submit a supplementary report on reconciliation with financial accounts to the directors, before the date fixed for holding the Annual General Meeting of the company (para 15, Appendix III of the Companies (Audit of Cost Accounts) Rules, 1998. The requirement of re-conciling with financial account considerably enlarges the scope of the cost auditors report. The cost auditor has to go beyond the cost of production and cost of sales and examine such items as appear in the financial accounts, but not in the cost accounting records, for the conciliation purpose. This aspect of the cost auditors report has been further explained hereinafter.
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Cost Auditors Report

1.1 Submission of Cost Audit Report: According to sub rule 3 of Rule 4 of the Companies (Audit of Cost Accounts) Rules 1998: The cost auditor shall make out a report within 60 days of his appointment to the Directors in the form set out in Appendix II, alongwith statement of capacity utilisation and stock in trade as specified in clauses (a) and (b) of sub rule (1), in the form set out in Appendix III and simultaneously shall submit two copies thereof to the Securities and Exchange Commission of Pakistan and the registrar concerned. The prescribed form of the cost auditors report requires a cost auditor to confirm that the cost accounting records have been or have not been maintained in accordance with the cost accounting record order/rules, issued under clause (e) of sub-section (1) of Section 230 of the Companies Ordinance 1984. In view of the varying practices followed in record keeping and maintaining cost accounting records, by companies to which the cost accounting record order/rules apply, the cost auditor should carefully express an opinion, after satisfying himself that all the information required in the prescribed Schedules and Annexures is readily available in a verifiable form in the cost accounting records maintained. 1.2 The Report Format:
CHAPTER IX
The cost auditor in his report has to confirm the conclusions drawn from the cost audit evidence gathered during performance of cost audit. Any deviation or error of omission or commission in the records or in the maintenance of cost accounting records observed during cost audit may be rectified by the company during the course of the cost audit, in order to avoid an unfavourable opinion in the cost auditors report. The cost auditor has also to confirm in his report that all information and explanations required by him were readily provided, which to the best of his knowledge and belief were necessary for the purpose of cost audit. The cost auditor has to confirm in his report that proper returns, statements, schedules for the purpose of audit of cost accounts were duly received from branches and offices not visited by him, and that the books and records give or do not give the information required by the rules in the manner required. He has also to give his opinion on the statements of capacity utilisation and stock in trade, and confirm that the same are in agreement with the books of the accounts of the company and exhibit true and fair view of the companys affairs. The cost auditor has also to confirm whether or not the cost accounting records maintained by the company give a true and fair view of the cost of production, processing, manufacturing and marketing of each product of the company under reference. In giving this opinion, the cost auditor uses his judgement, keeping in view all his findings during the course of cost audit and the audit evidence collected by him. 2. Appendix III of Companies (Audit of Cost Accounts) Rules 1998:
In Appendix III referred to in sub rule 3 of Rule 4 of the Companies (Audit of Cost Accounts) Rules 1998, particulars which have to be included in the cost auditors report to the directors of the company have been enumerated. Most of the particulars which should be included in the cost auditors report have been discussed in the foregoing chapters of this Handbook while describing performance of cost audit procedures. Evaluating the cost accounting system has been described in chapter VII. Audit of capacity utilisation, production, raw materials, wages and salaries, stores and spare parts have been explained in chapter VI. Depreciation and overheads alongwith other important elements of cost have been elucidated in the same chapter i.e. chapter VI. The remaining items given in Appendix III, which have to be commented upon in the cost auditors report, are given in the paragraphs which follow.

3. Royalty/Technical Aids Payments:
60
Industrial units which have acquired technology under some agreement have to pay royalty or make some technical assistance payment, which amount should appear as part of the cost of the product. The cost auditor evaluates the total amount of such royalty/technical aid fee payable for the year and sees that the amount is in accordance with the agreement. Such amount forms a part of the cost of production and its incidence on per unit cost should be computed. Cost auditor should also look into whether: (i) the agreement is legally in force and (ii) the agreement is in line with the laws and regulations. 4. Abnormal Non-recurring Features:
If there have been any abnormal and/or non-recurring features affecting production during the year, such as strikes, lock-outs, major break-downs in the plant, substantial power cuts, serious accidents etc., they should all, as far as practicable, be mentioned in the cost auditors report and their impact on the cost of production should be indicated. Similarly, if some abnormal and/or non- recurring costs were incurred during the year and were directly allocated to the cost of the products under reference, the total amount so allocated and the incidence on the per unit cost, should be indicated in the cost auditors report. Abnormal and non-recurring costs should be tested both for principle and materiality. As a result of any unusual event, like major break-down, sabotage etc., considerable wastage of material inputs may have occurred. The cost auditor should consider all aspects and not just take the impact of total fixed expenses on the cost of production. 5. Cost of Production:
The cost per unit of each category, variety, or quality of the product under reference, with comparative figures in the previous year, and comments on the reasons for differences should be included in the cost auditors report. Such an analysis and comparison will also help in reconciling the total cost of the product under reference with the total cost of production, which can also be worked out from the figures given in financial accounts. Figures of financial accounts include provisions, allocation and appropriation of expenditure, which may have been paid in the previous year or may be paid in the next year, but relates to the current years production. If there are any such adjustment made in the financial accounts, these should become obvious as a result of reconciling the cost accounting information with financial accounts. Moreover, it is necessary to determine cost of different varieties, categories, qualities of each product in order to make an analytical study of the contribution made by each type of product. 6.1 Sales and Profitability:
Although cost of selling has been dealt with in an earlier chapter of this Handbook, according to para 12 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, sales in quantity and net sales realisation of different categories, varieties or qualities of product under reference, showing the average sales realisation per unit, should be shown in the cost auditors report. If the Product under reference is exported, net realisation per unit, countries to which exported, indicating the profit or loss in export, should be specifically explained in the cost auditors report. Sales of different quantities and qualities of the product under reference can help to make an interesting and useful study of contribution analysis. If it is possible to increase the volume of sales of such qualities or quantities as are yielding a higher contribution, it should be possible for the company to increase its profits. In the case of export, it may be observed that export to every country, to which the product under reference was exported, may not be yielding the same amount of profit per unit. The reasons can be many such as a better price in one country or higher cost of packing and higher amount of freight incurred on exporting to another country. 6.2 Profit/(Loss) Per Unit:
According to para 13 of Appendix III, the profit per unit on each category, variety or quantity of the products, comments on the comparative profits of different categories of the products per unit as well as in terms of per machine hour etc., and comments on the adequacy or otherwise of product for maximisation of profit should also be identified in the cost auditors report. This exercise would help in studying the contribution made by sales of different quantities and different varieties of the products, also profitability of different market segments. Larger

quantities result in longer, continuous production runs and should normally yield a higher amount of profit compared to smaller quantity produced during intermittent production runs, bearing a higher incidence of setting up, test runs , wastages and other overhead costs. 6.3 Financial Ratio Analysis:
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In order to evaluate the companys financial position and profit performance, the cost auditor performs checkups on various aspects of the companys financial health. A tool frequently used during these checkups is working out financial ratios. Ratios provide a basis of carrying out both internal and external comparisons. A financial ratio, which relates to two accounting numbers, is obtained by dividing one number by the other. Ratios can be used for comparing changes within the company from period to period, or may be used for comparing the position with another company. Financial ratios may compare the financial position or profit performance of the company. For comparing the financial position, balance sheet figures are used and for comparing the profit performance, figures of the profit and loss account are used. From the balance sheet figures, financial leverage, or the gear ratio, which are from the debt ratios may be calculated. These ratios show the extent to which the company is financed by loans. Cost and Management Accountants are quite familiar with such gear ratios. Liquidity ratio measures the companys ability to meet short-term obligations. From the profit and loss account figures, leverage ratio may be calculated which relates the financial charges of the company to its ability to service or cover them. Activity ratio measures how effectively the company is using its assets. Various profitability ratios are also worked out, which relate profit to sales and to investment. 7. Cost Auditors Observations and Conclusions:
Para 14 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, is important, particularly insofar as it requires the cost auditor to make such observations and conclusions with which the management of the company may not agree. These observations and conclusions should be made on the basis of reliable cost audit evidence. The provisions of the para quoted here should be carefully noted: (a) (b) (c) Matters which appear to him to be clearly wrong in principle or apparently unjustifiable. Cases where the companys funds have been used in a negligent or inefficient manner. Factors which could have been controlled, but were not controlled resulting in increase in the cost of production. (i) The adequacy or otherwise of budgetary control system, if any, in vogue in the company; and (ii) (e) the scope and performance of internal audit, if any.
(d)
Suggestions for improvements in performance e.g., by(i) (ii) (iii) rectification of general imbalance in production facilities; fuller utilisation of installed capacity; comments on areas offering scope for(a) cost reduction; (b) increased productivity;

(c) key limiting factors causing production bottle-necks; (d) improved inventory policies; or (e) energy conservancy; (iv) (v) state of technology, whether modern or obsolete; and plant, whether new or second-hand when installed.
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63
APPENDIX I Companies (Audit of Cost Accounts) Rules, 1998
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PART II
Statutory Notifications (S.R.O.)
Government of Pakistan
Corporate Law Authority
Notifications Islamabad, the 24th July, 1998

S.R.O. 846 (1)/98. - In exercise of the powers conferred by Sections 258 and 506 of the Companies Ordinance, 1984 (XLVII of 1984), read with the Finance Divisions Notification No. S.R.O. 698 (1) 86, dated 2nd July, 1986, the Corporate Law Authority hereby makes the following rules, the same having been published previously as required by sub-section (1) of the said Section 506, namely:COMPANIES (AUDIT OF COST ACCOUNTS) RULES, 1998 1. Short title, application and commencement. - (1) These rules may be called the Companies (Audit of Cost Accounts) Rules, 1998. (2) These rules shall apply to companies or class of companies, which are required by the Corporate Law Authority through a general or special order issued under clause (e) of sub-section (1) of Section 230 of the Companies Ordinance, 1984, to include in their books of accounts, such particulars relating to utilisation of material or labour or to other inputs or items of cost, as specified in that order. They shall come into force at once.
(3) 2.
Definitions. - In this rules, unless there is anything repugnant in the subject or context,(a) (b) Appendix means an Appendix to these rules; company means a company formed and registered under the Companies Ordinance, 1984 (XLVII of 1984), and to which these rules apply; director means a director of a company; and cost auditor means a cost auditor appointed under rule 3.
(c) (d)

3. Appointment of cost auditors. - (1) Every company shall be required to get its cost accounts audited by a cost auditor who is a Chartered Accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961), or a Cost and Management Accountant within the meaning of the Cost and Management Accountants Act, 1966 (XIV of 1966). (2) The cost auditor shall be appointed by the directors with the prior approval of the Corporate Law Authority within sixty days of the close of financial year of the company. The company shall apply to the Corporate Law Authority in the form set out in Appendix 1 for appointment of cost auditor not later than thirty days before the date on which cost auditor is to be appointed. None of the following persons shall be appointed as cost auditor of a company, namely:(a) a person who has been appointed as auditor of the company for the respective period under section 252 of the Companies Ordinance, 1984; a person who is, or at any time during the preceding three years was, a director, officer or employee of the company; a person who is a partner of, or in the employment of, a director, officer or employee of the company; a spouse of a director of the company; a person who is indebted to the company; and a body corporate.
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(3)
(4)
(b)
(c)
(d) (e) (f)
Explanation. - In this sub-rule reference to an officer or employee shall be construed as not including reference to a cost auditor. (5) The remuneration of the cost auditor shall be fixed by the directors.
4. Cost auditors report. - (1) Every company shall, in addition to the records and statements specified in the order of the Corporate Law Authority issued under clause (e) of sub-section (1) of section 230 of the Companies Ordinance, 1984, prepare(a) a statement of production capacity of the plant, in terms of machine hours and production units, the actual utilisation of the capacity and the reasons of difference between the two; and a statement of stock-in-trade of the company as at the end of financial year in terms of quantity and cost thereof distinguishing between(i) stock of raw material and components;
(b)
(ii) stock of work in process; (iii) stock of finished products; and (iv) other stocks. (2) The statement specified in clauses (a) and (b) of sub-rule (1) shall be signed by the chief executive and chief accountant of the company.

(3) The cost auditor shall make out a report within sixty days of his appointment to the directors in the form set out in Appendix II alongwith a statement of capacity utilisation and stock-in-trade as specified in clauses (a) and (b) of sub-rule (1) in the form set out in Appendix III and simultaneously shall submit two copies thereof to the Corporate Law Authority and the registrar concerned. The company shall, within thirty days from the date of receipt of copy of the report, furnish the Corporate Law Authority with full information and explanation on every reservation or qualification contained in such report.
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(4)
5. Penalty. - Whoever fails or refuses to comply with, or contravenes any provision of these rules, or knowingly and wilfully authorises or permits such failure, refusal or contravention shall, in addition to any other liability under the Companies Ordinance, 1984, be also punishable with fine not exceeding two thousand rupees and, in case of continuing failure, refusal or contravention, with a further fine not exceeding one hundred rupees for every day after the first during which such contravention continues.
Exposure Draft of Third Revised Cost Audit Hand Book Appendix I

(See rule 3(3))
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Form of Application to the Corporate Law Authority for Appointment of Cost Auditors
1. 2. 3. 4. 5. 6. Name of the company together with the address of its registered office and the date of its incorporation: Status of company: Capital structure of the company: Principal line(s) of business of the company: Proposal for which the Corporate Law Authoritys approval is sought indicating the product for which cost audit is ordered: (a) (b) The name and address of the cost auditor who is recommended to be appointed: Whether the proposed cost auditor is a Chartered Accountant within the meaning of Chartered Accountants Ordinance, 1961 (X of 1961), or Cost and Management Accountant within the meaning of the Cost and Management Accountants Act, 1966 (XVI of 1966), and whether he has a certificate of practice: The associateship/fellowship No. of the cost auditor:
(c) 7. 8. 9. 10. 11. 12. 13. 14.
Whether the cost auditor is subject to any disqualification under rule 3 (3). Remuneration for the cost auditor: The financial year or years to be covered by the cost audit: Date of the meeting of the directors recommending the name of the cost auditor: A certified copy of the resolution passed by the directors of the company sanctioning the proposal for which the Corporate Law Authoritys approval has been sought: Name and address of the previous cost auditor, if any, together with the financial year of the company which was subjected to cost audit: If there is any change in the appointment of cost auditor, the reasons therefore may be stated: Declaration I/We solemnly declare that facts stated in the application are true to the best of my/our knowledge, information and belief.
Signature :________________ Designation (Chief Executive)
Dated: This ____________, day of _____________, 200__
NOTE: The application should be enclosed with challan of Rs. 200/= being application fee and resolution of BOD relating to appointment of Cost Auditor.

Appendix II
(See rule 4(3))
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Cost Auditor's Report

I/We ., having been appointed to conduct an audit of cost accounts of Messrs .., have examined the books of account and the statements prescribed under clause (e) of sub-section (1) of section 230 of the Companies Ordinance, 1984 and the other relevant record for the year ended on and report that (1) I/We have/have not obtained all the information and explanations which to the best of my/our knowledge and belief were necessary for the purposes of this audit. In my/our opinion (a) proper cost accounting records as required by clause (e) of sub-section (1) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984) and as required by these rules, have been/have not been kept by the company; proper returns, statements and schedules for the purpose of audit of cost accounts have/have not been received from branches not visited by me/us: the said books and records give/do not give the information required by the rules in the manner so required; and
(2)
(b)
(c)
(3)
In my/our opinion and, subject to best of my/our information (a) the annexed statement of capacity utilisation and stock-in-trade are/are not in agreement with the books of account of the company and exhibit true and fair view of the company's affairs; and cost accounting records have/have not been properly kept so as to give a true and fair view of the cost of production, processing, manufacturing and marketing of the under mentioned products of the company, namely :(i) (ii) (iii) The matter contained in the ANNEX forms part of this report. Dated : This ________________, day of ___________,
(b)
Signature: (Name of the Cost Auditor or firm of Cost Auditors)

Appendix III
(See rule 4(3))
69
Particulars to be Included in Cost Auditors Report to the Directors of the Company

1. Capacity. - (a) Licensed, installed and utilised capacities of the factory or factories for the products under reference. (b) If the company is engaged in other activities besides the manufacture of the product under reference, give a brief note on the nature of such activities.
2.
Cost accounting system. - Brief comments on the cost accounting system and its adequacy or otherwise to determine correctly the cost of the product under reference. Production. - (a) Production in quantities of each type of product under reference. (b) Percentage of production of the product under reference in relation to installed capacity. If there is any shortfall in production as compared to the installed capacity, brief comments as to the reasons for the shortfall. If there is any addition to the production capacity during the year under review or in the immediately preceding two years, this may also be mentioned.
3.
(c)
4.
Raw materials. - (a) The cost of major raw material consumed both in terms of quantity and value. Where the cost of transport, etc., of raw material is significant, specify the same separately. (b) Consumption of major raw material per unit of production compared with the standard requirements, if any. Explanations for variances, if any, in the consumption of major raw material per unit of production as compared to the preceding two years, and with standard requirement, if any. Comments on the method of accounting followed for recording the quantities and value of receipts, issues and balances of all material directly used in production.
(c)
(d)
5.
Wages and salaries. - (a) Total wages and salaries paid for all categories of employees, separately in respect of each of the following namely:(i) (ii) (iii) (iv) (v) (vi) direct labour costs on production; indirect employees cost on production; employees cost on administration; employees cost on selling and distribution; bonus to workers and employees; other employees cost, if any (including taxes and levies); and
(vii) total employees cost (total of items (i) to (iv) above).

(b) (c) (d) (e) (f) (g) Salaries and perquisites of directors and chief executive. Total man-days of direct labour available and actually worked for the year. Average number of workers employed for the year. Direct labour cost per unit of output of the product (give information in respect of each). Brief explanations for variances in item (e) above, if any, as compared to the previous two years. Comments on the incentive schemes, if any, with particular reference to in contributions towards increasing productivity and its effect on cost of production.
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6.
Stores and spare parts. - (a) The expenditure per unit of output on stores, etc. (b) Comments on the system of stores accounting for recording receipts, issues and balances, both in quantities and values. If practicable, the proportion of closing inventory of stores representing items which have not moved for over twenty four months.
(c)
7.
Depreciation. - (a) The method of depreciation adopted by the company, e.g. straight line or diminishing balance, etc. (b) (c) The basis of allocation of depreciation on common assets to the different departments. The basis of charging depreciation to the cost of products.
8.
Overheads. - (a) The total amounts of the following overheads and a break-up of items (i), (ii), and (iii) below:(i) (ii) (iii) (iv) (b) Factory overheads, Administration overheads, Selling and distribution overheads, Financial charges. Reasons for any significant variances in the expenditure incurred against the item, included in overheads as compared with previous two years. The basis of allocation of overheads to cost centres and of absorption comments, if any, on the basis of allocation adopted by the company. to products with brief
(c)
(d)
Cost of packing, if any, of the products under, reference to be shown separately with details to the extent possible.
9.
Royalty/technical aid payments. - The total amount of royalty/technical aid fees payable for the year and the amount chargeable per unit of product. Abnormal non-recurring features. - (a) If there were any abnormal features affecting production during the year, e.g., strikes, lock-outs, major breakdowns in the plant, substantial power cuts, serious accidents, etc., they shall, wherever practicable, be briefly mentioned indicating their impact on the cost of production.
10.

(b) If there are any special expenses which have been directly allocated to products under reference, the total amount as also the incidence per unit of product shall be shown.
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11.
Cost of production. - The cost per unit of different categories, varieties, or qualities of each of the products under reference with comparative figures for the previous year and comments on the reasons of difference. Sales. - (a) The sales in question and net sales realisation of the different categories, varieties of quantities of product under reference showing the average sales realisation per unit. (b) If product under reference is exported, quantity exported, net realisation per unit, countries to which exported indicating the profit or loss incurred in export.
12.
13.
Profitability. - The profit per unit earned on each category, variety or quantity of the products, comments on the comparative profits of different categories of the products per unit as well as in term of per machine hour, etc, and comments on the adequacy or otherwise of product for maximisation of profit. Cost auditors observation and conclusion. (a) (b) (c) Matters which appear to him to be clearly wrong in principle or apparently unjustifiable. Cases where the company's funds have been used in a negligent or inefficient manner. Factors which could have been controlled, but have not been controlled resulting in increase in the cost of production. (i) The adequacy or otherwise of budgetary control system, if any, in vogue in the company; and (ii) the scope and performance of internal audit, if any, (e) Suggestions for improvements in performance, e.g. by (i) rectification of general imbalance in production facilities; (ii) fuller utilisation of installed capacity; (iii) comments on areas offering scope for (a) cost reduction; (b) increased productivity; (c) key limiting factors causing production bottle-necks; (d) improved inventory policies; or (e) energy conservancy; (iv) state of technology, whether modern or obsolete; and (v) plant, whether new or second-hand were installed.
14.
(d)
15.
Reconciliation with financial account. - After the auditor appointed under section 252 of the Companies Ordinance, 1984, submits his report, the cost auditor shall submit a supplementary report on reconciliation

with financial accounts, to the directors before the date fixed for holding the annual general meeting of the company. 16. Cost statement. - Copies of all the cost statements on the formats prescribed by the Corporate Law Authority under clause (e) of sub-section (1) of section 230 of the Companies Ordinance, 1984, duly authenticated by the chief executive and chief accountant of the company, and verified by the cost auditor, shall be appended to the report. Miscellaneous. - As far as practicable, comparison of all figures of cost and production shall be made with the figures of previous year.
72
17.
Registrar of Companies
73
APPENDIX II Example of a Cost Audit Acceptance Letter
Exposure Draft of Third Revised Cost Audit Hand Book Appendix
74
Example of a Cost Audit Acceptance Letter:

The following letter is for use as a guide in conjunction with the considerations outlined in this Handbook and will need to be varied according to individual requirements and circumstances. To the Board of Directors or the appropriate representative of senior management: You have requested that we audit the cost accounting statements as of __________. We are pleased to confirm our acceptance of this engagement, subject to the approval by SECP. Our audit will be made with the objective of our expressing an opinion on the cost accounting statements. We will conduct our audit in accordance with Companies (Audit of Cost Accounts) Rules 1998. It is required that we plan and perform the audit to obtain reasonable assurance about whether the cost statements are free of material misstatements. A cost audit includes assessing the cost accounting principles used and significant estimates made by management, as well as evaluating the overall cost accounting system. Because of the nature and other inherent limitations of an audit, together with the inherent limitations of any cost accounting system, there is an unavoidable risk that even some material misstatements may remain undiscovered. In addition to our report on the cost accounting statements, we expect to provide you with a separate letter concerning any material weakness in cost accounting system which come to our notice. We remind you that the responsibility for the preparation of cost accounting statements, capacity utilisation statement and inventory statements is that of the management of the company. This includes the maintenance of adequate cost accounting records and internal controls and the selection and application of cost accounting principles. As part of our cost audit process, we will request from the management written confirmation concerning representations made to us in connection with the cost audit. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit. Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required. We trust prescribed obtaining SECP, to you have applied to the Securities and Exchange Commission of Pakistan, in the form in sub-section 3 of Section 3 of the Companies (Audit of Cost Accounts) Rules 1998, for approval of our appointment as Cost Auditor., We are also sending a copy of this letter to signify our acceptance, subject to their approval.
This letter will be effective for future years unless it is terminated, amended or superseded. Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the cost accounting statement.
XYZ & Co.

Acknowledge on behalf of ABC Company by ______________________________________ (signed) Name and Title : ________________________ Date : _________________________________
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APPENDIX III Vegetable Ghee and Cooking Oil Companies (Cost Accounting Records) Order, 1990
Exposure Draft of Third Revised Cost Audit Hand Book The Gazette of Pakistan
76
PART II
Statutory Notifications (S.R.O.)
Government of Pakistan
Corporate Law Authority (Corporate Regulation Wing)
Notification
Islamabad, the 1st November, 1990
Vegetable Ghee And Cooking Oil Companies (Cost Accounting Records) Order, 1990
S.R.O. 1131 (I)/90. - In exercise of the powers conferred by sections 230 and 506 of the Companies Ordinance, 1984 (XLVII of 1984) read with the Finance Division Notification No.S.R.O 698 (I)/86, dated the 2nd July, 1986, the Corporate Law Authority is pleased to make the following Order, the same having been previously published as required by the said section 506, namely:-
Vegetable Ghee and Cooking Oil Companies (Cost Accounting Records) Order, 1990
1. Short title, extent and commencement, (1) This Order may be called the Vegetable Ghee and Cooking Oil Companies (Cost Accounting Records) Order, 1990. (2) It extends to the whole of Pakistan.

(3) It shall come into force on such date as the Corporate Law Authority may by notification in the official Gazette, appoint. or
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2.
Application, - This Order shall apply to every company engaged in production, processing manufacturing of:(a) (b) vegetable ghee, cooking oil, margarine bakery shortening and allied products; and
In addition to vegetable ghee and cooking oil, any other product such as refined hard oil, margarine or any such product using the same plant or machinery, partly or fully.
3.
Maintenance of records. - (1) Every company to which this Order applies shall, in respect of each financial year commencing on or after the commencement of this Order, keep cost accounting records, containing inter alia the particulars in Schedules I and II to this Order. (2) Where a company is manufacturing any other product in addition to those referred to in paragraph 2, the particulars relating to the utilisation of materials, labour and other items of cost insofar as they are applicable to such other product shall not be included in the cost of the products referred to in that paragraph. The cost accounting records referred to in sub-paragraph (1) shall be kept in such a way as to make it possible to calculate from the particulars entered therein the cost of production and cost of sales of each of the products referred to in paragraph 2 during a financial year. It shall be the duty of every person referred to in sub-section (7) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984), to comply with the provisions of sub-paragraphs (1) and (3) in the same manner as they are liable to maintain financial accounts required under section 233 of the said Ordinance.
(3)
(4)
4.
Penalty. - If a company contravenes the provisions of paragraph 3, the company and every officer thereof who is in default, including the person referred to in sub-paragraph (4) of paragraph 3, shall be punishable under sub-section (7) of section 230 of the Companies Ordinance, 1984.
Joint Registrar (H.Q.)
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SCHEDULE 1 (See Paragraph 3 )

I. Production material (Raw edible oils, chemicals and vitamins) (a) Record of each item of production material in stock, required or actually used for producing, processing or manufacturing any of the products referred to in paragraph 2 shall be maintained. It shall show the quantity and cost of every receipt and issue made from the stock. All issues of production materials shall be reconciled with the figure shown in proforma 'B' of Schedule II, or in any form as near thereto as possible. Any losses/surpluses arising as a result of physical verification of inventories and adjustment thereof shall be clearly indicated in the cost records. Record of purchase/supply contracts entered into/with local and foreign suppliers will be maintained showing the rate at which the various quantities of materials are to be purchased. The record shall indicate principal features of each contract, particularly, conditions relating to the quality, price and period of delivery, discount for transit loss and terms of payment including cash discounts, if any, and compensation, the supplier shall pay for delay in delivery and non-delivery. The records shall also show the deliveries received against each contract of material supply. The supply contracts shall also indicate the conditions relating to rebate for quality variations in FFA (free fatty acids), colour and moisture in case of raw edible oils: and in case of other materials usual quality standards shall be specified in the supply contracts for the purpose of rebates. Where arrangements exist for production of any of the production materials by the facilities owned by the company, separate records showing the cost of manufacture of such materials indicating the break-up of raw materials consumed and conversion cost shall be maintained. The records shall also indicate the basis on which such materials are priced for transfer to the manufacture or processing of vegetable ghee/cooking oil. The cost, in addition to the basic price of the materials shown in the records shall also include all other direct charges incidental to the procurement of production materials up to the works. Any abnormal wastage of material whether in transit, storage or for any other reason, shall be recorded separately indicating the stage at which such losses occur. Method of dealing with such losses in the calculation of cost shall be indicated in the records. Normal wastages will be absorbed by the remaining material itself. Difference between the quantity of raw edible oils introduced into the process and the yield obtained, commonly referred to as the process loss or refining loss includes waste materials (by-product) called visible loss which is part of TFM (total fatty matter) and a small quantity of invisible loss. Realisable value of the by-products, extracted from the oil, shall be credited to the cost of oil. Realisable value of the used chemicals recovered shall be credited to the cost of such materials to arrive at the net cost of chemicals consumption. By products, such as oxygen or carbon dioxcide and the nitrogen as the case may be, obtained from the generation of hydrogen, by different processes, shall also be credited to the respective process cost centres to determine the net cost of hydrogen available for use. The records shall be maintained in such detail as may enable the company to compile the cost data in Annexures A-1, and A-2, of proforma 'A' of Schedule II or in any form as near thereto as practicable.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)

II. Direct Labour (a) Adequate record shall be maintained to show the attendance of workers employed by the company whether on regular, temporary, or piece-rate basis or on contractual basis. Proper record shall also be maintained in respect of payment made for overtime work and other production incentives given to the workers and payments to any contract or for the work performed. Fair and reasonable allocation shall be made for wages paid to such direct labour as has been utilised in more than one department, between the various manufacturing departments or cost centres and the basis of such allocation shall be consistently followed. Idle time or lay-off payments shall be recorded separately indicating the reasons and the method of treatment in the calculation of the cost of the items referred to in paragraph 2. Any wages being expenditure on additions to plant, machinery or other fixed assets shall be allocated to the relevant capital heads in the accounts. In case of wages and salaries being allocated on a basis other than actuals, reconciliation of wages and salaries to the actuals and the treatments of variances, if any, in determining the cost of the products shall also be indicated in the cost records.
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(b)
(c)
III.
Steam (a) Adequate records shall be maintained to ascertain the cost of steam produced and charged to different processes. The cost of steam may be determined on an estimated basis if it is not possible to determine the actual cost. In case the cost of steam is allocated to different processes on any basis other than actual cost, reconciliation of the actual cost of steam produced and the treatment of variances, if any, in determining the cost of items referred to in Paragraph 2, shall be indicated in the cost records. The record shall be maintained in such details as may enable the company to compile the cost data in Annexure A-3 of proforma 'A of Schedule II or in any form as near thereto as practicable.
(b)
IV.
Hydrogen Adequate records shall be maintained to ascertain the cost of hydrogen produced and charged to vegetable ghee and cooking oil production as well as that sold.
V.
Water Appropriate record shall be maintained to determine the cost of water used by the company. The expenditure on water shall be allocated to boiler house and oil processing on estimated basis which shall be used consistently from year to year and indicated in the cost records.
VI.
Electric Power (a) Adequate records, showing quantity and cost of electric power purchased, with fixed charges and duties incurred thereon, shall be maintained. The cost of electric power shall be kept separately for each item. The consumption shall be calculated on a reasonable basis and applied consistently. Where electric power is generated by the company itself or by its wholly owned subsidiary, separate records, shall be maintained in such details as may enable the company to compile; cost data in Annexure A-4 or proforma 'A' of 'Schedule II' or in any form as near thereto as practicable. The records shall be so maintained as to enable the assessment of consumption of power by the different departments or manufacturing units or cost centres. Allocation of the cost of electric power shall be on the basis of actual consumption, if separate meters are installed or on the basis of technical estimates in the absence of meters. In the case of fixed charges or fuel adjustment surcharge claimed by KESC or WAPDA, irrespective of the actual power consumed and if the amount payable as per
(b)
(c)

actual consumption falls below the contractual minimum, the difference between the contractual minimum and the acutal amount shall be treated as fixed/period cost and treated accordingly. Cost of power consumed in and chargeable to non-manufacturing departments, if significant, shall be shown separately. VII. Consumable Stores (a) Record of each item of consumable stores shall be maintained to show the receipts, issues and balances, both in quantities and values, required or actually used for the manufacture of items referred to in paragraph 2. Cost of consumable stores shall include all direct charges incidental to procurement of each item up to works. The cost of such stores consumed shall be charged to relevant cost centres on the basis of actual consumption. The items issued for capital expenditure, such as addition to plant and machinery, shall be shown under relevant heads. Wastage of consumable stores, whether in transit, storage or at any point, shall be quantified and shown separately. Method of dealing with such losses in costing shall also be indicated in the cost records.
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(b)
(c)
VIII. Repairs and Maintenance Adequate records showing expenditure incurred on workshop facilities for repairs and maintenance of plant and machinery shall be maintained. Details of cost determination and their basis of allocation of repairs and maintenance expenditure to different departments or manufacturing units or cost centres shall be indicated. Cost of work of capital nature of heavy repairs and maintenance cost, benefit of which is likely to be spread over a period longer than one financial year, shall be shown separately. IX. Packing (a) Adequate records shall be maintained showing the cost of packing materials and direct wages and other expenses incurred in respect of different items packed. Where such expenses are not capable of being charged directly against individual items, basis of apportioning the expenses shall be clearly indicated in the cost records and applied consistently. Where the tin containers are fabricated by the company itself or wholly or partly fabricated by the outside in fabricators for the company or wholly or partly manufactured tin containers are purchased from the market, separate record shall be maintained for each lot of the containers under each category. In case tin containers are wholly or partly manufactured/fabricated by the company itself, the records shall be maintained in such details as may enable the company to compile the cost data in the form of Annexure A-5 of proforma 'A' of Schedule II.
(b)
(c)
X.
Chilling Appropriate record of cost incurred in connection with refrigeration facilities provided for chilling of items referred to in paragraph 2 shall be maintained in sufficient details as may enable the company to compile the cost data in Annexure A-6 of proforma 'A' of Schedule II.
XI.
Depreciation (a) Adequate records shall be maintained showing values and other particulars of the fixed assets in respect of which depreciation is to be provided. The records shall inter alia indicate the cost of each item of assets, the date of its acquisition and the rate of depreciation.

(b) Basis on which depreciation is calculated and allocated to the various departments and products shall be clearly indicated in the records. Amount of depreciation chargeable to the different departments, manufacturing units or cost centres, for the financial year shall be in accordance with the provisions of clause 'F' of part II of the Fourth Schedule to the Companies Ordinance, 1984, and shall relate to the plant and machinery and other fixed assets utilised in such departments or units or cost centres. The method once adopted shall be applied consistently.
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(c)
XII. Insurance (a) Record shall be maintained showing the insurance premia paid for the various risks covered on the assets and other interests of the company. Method of allocating insurance cost to the various cost centres shall be indicated in the cost records and followed consistently.
(b)
XIII. Other fixed overheads Adequate records showing the amounts comprising the manufacturing overhead expenses and details of apportionment thereof to the various departments or manufacturing units or cost centres, shall be maintained. The factory overheads shall include among other items, indirect labour cost alongwith its share of labour related costs such as fringe benefits, other labour and staff welfare expenses, and establishment expenses of manufacturing of items referred to in paragraph 2. XIV. Administration, selling and distribution Adequate records shall be maintained showing the items comprising administration, selling and distribution expenses and apportionment thereof to the different products and the basis of allocation of overhead cost shall be indicated in the records. XV. By-product Adequate records shall be maintained showing the quantity of by-products obtained and the basis of pricing adopted for giving credit thereof to the main product. Any subsequent use of the by-products, such as soap stock being converted into laundry soap, and other products like glycerene etc., shall also be recorded and reconciled. XVI. Work-in-process and finished goods inventories Record of work-in-process inventories at each material stage of process and finished goods inventories, physically checked and verified at the close of the financial period, duly reconciled with the books of accounts, shall be maintained. Method of valuation of work-in-process and the finished goods inventories shall be indicated in the cost records so as to reveal the cost elements which have been taken into account in such computation. The cost elements shall be related to the items referred to in the proforma 'A' of Schedule II. The method adopted shall be consistently followed. Treatment of differences, if any, on physical verification of stocks with book balances, shall also be indicated in the records. XVII. Statistical statements and other records (a) Statistical statements and other records such as yield statement, TFM (total fatty matter), recovery and other by-products statement details relating to chemical and energy consumption, tinplate yield and scrap records and relevant data shall be maintained in such details as may enable the company to comply with the requiremetns of this Schedule and Schedule II and to enable the cost auditor to report and perform his duties under section 258 of the Companies Ordinance, 1984.

(b) Companies may develop appropriate standards for use as a basis to evaluate performance properly.
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XVIII. Reconciliation of cost and financial accounts (a) The cost records shall be periodically reconciled with the financial accounts to ensure accuracy. Variations, if any, shall be clearly indicated and explained. The reconciliation shall be done in such a manner that the profitability of the product, as per cost statements, is correctly judged and reconciled with the overall profits of the company from all its activities. Adequate cost records shall be maintained in a manner so that the cost statements as required in Schedule II (proforma 'A' and annexures) can be compiled and the cost auditor is able to verify the statements with the records.
(b)
(c)
Exposure Draft of Third Revised Cost Audit Hand Book SCHEDULE II (See Paragraph 3)
PROFORMA A
83
Name and address of the company : ___________________________________________
Statement Showing Cost of Vegetable Ghee / Cooking Oil Manufactured and Sold During the Period From __________ To ____________.
1- Capacity Current period (a) (b) (c) Number of days worked: Installed capacity (Tonnes): Utilised capacity (Tonnes): (i) Vegetable ghee: 16 kg pack 5 kg pack 2.5 kg pack Cooking oil 17 litre pack 5 litre pack 2.5 litre pack Previous period
(ii)
(iii) Margrine (iv) (v) Bakery shortening Others if any (specify)

II- Costs:
Current period Total cost Cost per tonns Total cost Previous period Cost per tonns
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Particulars
1- Direct materials (i) Raw edible oils (as per Annexure A-1) (ii) Chemicals: (as per Annexure A-2) Production materials 23Direct Labour Variable factory Overheads (i) Steam : (as per Annexure A-3) (a) Used in neutraliser and other process: (b) Used in deodoriser: (ii) Hyderogen: (a) By gas Cracking process (b) By electrolysis process (iii) Water: (iv) Electric power cost (a) Purchased from WAPDA/KESC (b) Own generation (as per Annexure A-4) (v) Consumable stores: (vi) repairs and maintenance; (vii) Other overheads (specify) Variable factory overheads 4- Total Variable cost (Item 1+2+3) 5- Packing cost (as per Annexure A-5) 6- Chilling cost (as per Annexure A-6) 7- Total variable cost including packing and chilling cost.

Current period Total cost Cost per tonns Previous period Total cost Cost per tonns
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Particulars
8- Adjustment of work in process inventory (I) Add: Opening stock (a) At packing stage (b) At chilling stage (II) Less: Closing stock: (a) At packing stage (b) At chilling stage 9- Total variable cost of packed and chilled vegetable ghee/choking oil (Item 7+8) 10- Fixed Overheads 11- Total cost of goods manufactured (Item 9+10) 12- Adjustment of finished goods inventories. (i) Add: Opening stock (ii) Less: Closing stock 13- Net ex-works cost of sales. (Item 11+12) III. Sales. (i) Gross sales (ii) Less commission and discount (iii) Sales [(item (i) and (ii)] (iv) Less: Excise duty (v) Net sales
Notes:- 1. 2. 3. 4.
Separate cost statements shall be prepared in respect of vegetable ghee/cooking oil, margarine and bakery shortening etc. Excise duty to be excluded but shown separately as a deduction from sales. Abnormal losses, if any, both in quantity and cost shall be shown in a separate statements indicating the reasons therefore. The apportionment of common overheads to the vegetable ghee and cooking oil products, in the case of multiproduct units, shall be equitable.

Annexure A-1
Name and address of the Company
86
STATEMENT SHOWING THE RAW EDIBLE OILS CONSUMED DURING THE PERIOD FROM:__________ TO _________
CURRENT PERIOD Oil blen d% Qty. tonne Rate Total cost Oil blend %
PREVIOUS PERIOD Qty. tonne Rate Total cost
PARTICULARS 1- Oil in Put Imported (a) Palm oil (b) Soyabean oil (c) Others (specify) Local (a) Cottonseed oil (b) Rapeseed oil (c) Sunflower oil (d) Others (specify) Total: 2- Adjustment of oil in process inventories (i) Add: Opening stock (ii) Less: closing stock 3- Total oil consumed (Item 1+2) 4- Yield (Net production) 5- Process Loss: (Item 3-4) (a) By-products:Visible loss (actual quantity) at realisable value credited to cost of oil). (b) Invisible loss (quantity only)Sub-total of process loss. 6- Net cost of oil charged to production value at item 4 less 5(a).
Notes:1. 2. 3. 4.
100%
100%
Separate cost statements shall be prepared in respect of vegetable ghee/cooking oil, margarine and bakery shortening. The basis of arriving at the process less for each type of oil-blend shall be clearly indicated and compared with standards in the cost records. The actual input/output ratio and variations from standards shall be indicated. Abnormal losses, if any, both in quantity and cost shall be shown in a separate statements indicating the reasons therefore.

Annexure A-2
Name and address of the Company________________________________________________________ STATEMENT SHOWING THE COST OF CHEMICAL CONSUMED DURING THE PERIOD FROM:__________ TO _________
87
CURRENT PERIOD
Qty. CHEMICAL CONSUME Per M.T. Yield Rate Total Cost cost per tonne Qty. per tonne Qty.
PREVIOUS PERIOD
CONSUME Per M.T. Yield Rate Total Cost cost per tonne Qty. per tonne
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)
Bleaching earth Activated carbon Nickle catalyst Caustic soda Citric acid Phospheric acid Anti oxidant Common salt Ghee flavour Filter aids Vitamins A and D Other (specify Total chemicals Less: Credit for used chemical waste. (Realisable value) (a) Used fullers earth (b) Used nickle catalyst. (c) Others (specify) Net cost of chemical
Notes:- 1. 2. 3.
Separate cost statements shall be kept in respect of vegetable ghee/cooking oil, margarine/bakery shortening. The actual consumption per tonne of yield and variation, if any, from standard shall be indicated. Abnormal losses, if any, both in quantity and cost shall be shown in a separate statements indicating the reasons therefore.

Annexure A-3
Name and address of the Company________________________________________________________
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STATEMENT SHOWING THE COST OF STEAM PRODUCED FOR THE PERIOD FROM:__________ TO _________ I- Capacity: Type of steam boilers (a) (b) (c) Number of days worked Installed capacity (steam in cubit meters) Capacity utilisation (Steam in cubic meters) Current period Previous period
II- Cost: Boiler houses expenses Current period Total Cost per M3 cost of steam Previous period Total cost Cost per M3 of steam
(i) Fuel (coal/gas/furnace oil) (i) Fuel(coal/gas/furnace oil) (ii) Water (iii) Electricity (iv) Chemicals (vi) Consumable stores (vii) Salaries and wages (viii) Repair and maintenance (ix) Depreciation (x) Insurance (xi) Other Total cost of steam produced III- Sales and Transfers:
(a)
(b) (c)
Vegetable ghee/cooking oil production (i) Neutilizers and other process (ii) Deodorizer To gas cracking To any other section (specify) Total
Notes:- 1. 2.
The standard input/output ratio and variation from standards should be indicated. Abnormal losses, if any, both in quantity and cost shall be shown in a separate statements indicating the reasons therefore.

Annexure A-4
Name and address of the Company________________________________________________________ STATEMENT SHOWING THE COST OF ELECTRIC POWER GENERATION FOR THE PERIOD FROM:__________ TO _________
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I- Capacity:
Current period (i) Number of hours worked (ii) Installed capacity (KWH). (iii) Unutilised capacity (KWH). Previous period
II- Cost:
Particulars Current period Total cost Cost per KWH Previous period Total cost Cost per KWH
1- Fuel and oil 2- Salaries and wages 3- Consumable Store 4- Repair and maintenance 5- Depreciation 6- Insurance 7- Other overheads Total cost :
III- Sales and Transfers:

Current period Total cost Cost per KWH Previous period Total cost Cost per KWH
Particulars (i) Sales to outsiders (ii) charged to production (iii) charged to general uses (iv) Any other department (specify) Total sales/allocation
Notes:-
1. 2.
The standard input/output ratio and variation from standards should be indicated. Abnormal losses, if any, both in quantity and cost shall be shown in a separate statements indicating the reasons therefore.

Annexure A-5
90
STATEMENT SHOWING THE COST OF TIN MANUFACTURED DURING THE PERIOD FROM:__________ TO _________
I- Capacity:
Current period (i) Number of days worked (ii) Installed capacity 16 Kg/17 litre 5 Kg/5 litre 2.5 Kg/2.5 litre
Tin plate consumed (Tonnes) Total tins produced (Nos.) Yield tins Tonne (Nos.) Tin plate consumed (Tonnes) Total tins produced (Nos.) Yield per tonne (Nos.)
Previous period
(iii) Capacity utilisation 16 Kg/17 litre 5 Kg/5 litre 2.5 Kg/2.5 litre
II- Cost:
Particular 1 1- Materials Tinplate (M. Tons) Less: (i) Tinplate scrap (ii) Ticklies Net credit for tinplate scrap Net cost of tinplate be forward consumed 2- G.I. Wire hangers 3- Chemicals: (i) Soldering materials (ii) Zinc (iii) Hydrochloric acid Qty. 2 Current period Rate Total cost per tin 3 4 5 Qty. 6 Previous period Rate Total cost per tin 7 8 9
91
4567891011-
1 Labels/printing of tins Electricity, Power and/fuel Consumable stores Salaries and wages Repairs and maintenance Depreciation Insurance Other overheads (specify)
Total: 12- Adjustment of work in process inventories (i) Add: (Opening stock) (ii) Less: (Closing stock)
13- Total cost of tins manufactured 14- Adjustment of finished tins inventories (i) Add: (Opening stock) (ii) Less: (Closing stock)
15- Cost of tins consumed
Notes:-
1. 2.
Separate cost statement shall be maintained in respect of each size of container. Sales tax/excise duty on the containers, if any, may be indicated separately in the cost statement.

Annexure A-6
92
STATEMENT SHOWING THE COST OF CHILING FOR THE PERIOD FROM:__________ TO _________ I- Capacity:
Current period
Previous period
1- Number of days worked 2- Chilling capacity (Tonne) 3- Capacity utilisation (Tonne) II- Cost: Current period Cost per tonne/output Previous period Cost per tonne/output
Total (a) (b) (c) (d) (e) (f) (g) (h) Freon/amonia Power Wages and saleries Consumable stores Repairs and maintenance Depreciation Insurance Other overheads
Total
Total chiling cost
Notes:- 1. 2.
The standard input/output ratio and variation from standards should be indicated. Abnormal losses, if any, both in quantity and cost shall be shown in a separate statements indicating the reasons therefor.

Proforma B
93
STATEMENT SHOWING INVENTORIES OF FINISHED GOODS, RAW & PACKING MATERIALS AND OTHER ITEMS FOR THE PERIOD FROM:__________ TO _________
Opening stock (Qty.) Particular 1 1- Finished goods (M. tons) (a) Vegetable ghee: 16 Kg. Pack 5 Kg. Pack 2.5 Kg. Pack (b) Cooking Oil: 17 litre pack 5 litre pack 2.5 litre pack (c) Margarine (d) Bakery shortening (e) Others (specify) 2
Received during the period (Qty.) 3
Issued during the period (Qty.) 4
Physical stock adjustments if any (Qty.) 5
Closing stock (Qty.) 6
Total: 2- Empty finished tins (Numbers) 16 Kg. 17 Litre 5 Kg./5 Litre 2.5 Kg./2.5 litre Total:
3- By-products (specify)
94
1 4- Raw edible Oil (tonnes) Imported: i- Palm Oil ii- Soybean Oil iii- Others (sepcify) Local: iiiiiiivCottonseed Oil Rapeseed Oil Sunflower Oil Others (specify)
Total: 5- Chemical (KG): iiiiiiivvviviiviiiixxxixiiBleaching earch Activated carbon Caustic soda Nickle catalyst Citric acid Phospheric acid Anti oxidant Common salt Filter acids Ghee flavour Vitamins A and D Others (specify)
Total:
6- Others materials: iiiiiiivTi plant (Tonne). G.A. wire (Tonne). Soldering materials (K.G.) Others (specify)
7- Small tools 8- Any others stores (specify)
Total:
95
APPENDIX IV Cement Industry (Cost Accounting Records) Order, 1994

PART II
96
Statutory Notifications (S.R.O.) Government of Pakistan Corporate Law Authority (Corporate Regulation Wing) NOTIFICATION
Islamabad, the 14th May, 1994
S.R.O. 386 (I)/94.- In exercise of powers conferred by Sections 230 and 506 of the Companies Ordinance, 1984 (XLVII of 1984), read with the Finance Division Notification No. S.R.O. 698 (I)/86, dated the 2nd July, 1986, the Corporate Law Authority is pleased to make the following Order, the same having been previously published as required by sub-section (I) of section 506 of the said Ordinance, namely:-
CEMENT INDUSTRY (COST ACCOUNTING RECORDS) ORDER, 1994

1Short title, application and commencement. (1) This Order may be called the Cement Industry (Cost Accounting Records), Order, 1994. (2)This Order shall apply to every company engaged in production, processing and manufacturing of clinker or cement or both. It shall come into force on such date as the Corporate Law Authority may, by Notification in the official Gazette, appoint.
(3)-
2-
Maintenance of records. (1) Every company shall, in respect of each financial year commencing on or after the commencement of this Order, keep cost accounting records, containing inter alia the particulars specified in the Schedule to this Order. (2)The records referred to in sub-paragraph (1) shall be kept in such a way as to make it possible to calculate from the particulars entered therein the cost of production and cost of sales of each of the products referred to in sub-paragraph (2) of paragraph (1) separately, during a financial year. Where a company is manufacturing any other product in addition to clinker or cement or both, the particulars relating to the utilization of materials, labour and other items of cost in so far as they are applicable to such other product shall not be included in the cost of clinker or cement or both. It shall be the duty of every person referred to in sub-section (7) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984), to comply with the provisions of sub-paragraphs (1), (2) and (3) in the same manner as they are liable to maintain financial accounts required under section 233 of the said Ordinance.
(3)-
(4)-

3Penalty. If a company contravenes any of the provisions of this Order, such company and every officer thereof referred to in sub-paragraph (4) of paragraph 2 shall be punishable under sub-section (7) of sectin 230 of the Companies Ordinance (XLVII of 1984), 1984.
97
98
SCHEDULE
[(See paragraph 2 (1)]
Subject to the provisions of paragraph 1 (c) of this Schedule, cost records on quantitative and money value basis shall be maintained in respect of each of the following departments as applicable to each company:(1) (2) (3) (4) (5) (6) (7) (8) Note: (i) (ii) The cost record regarding cement stored in silos shall be covered in record of the grinding department; and The cost record regarding packed cement shall be covered in record of the packing and storage department. Quarry Transportation Crusher Stock hall (where applicable) Raw mill Kiln Grinding Packing and storage Annexure I. Annexure II. Annexure III. Annexure IV. Annexure V. Annexure VI. Annexure VII. Annexure VIII.
Cost of these departments are to be classified as direct departmental cost and indirect departmental cost so as to conform to or as near thereto as possible to such detailed headings as described in the various annexures. Indirect departmental cost represent cost of service departments such as those producing compressed air (Annexure IX), power (Annexure X) and other general expenses (Annexure XI). The indirect departmental cost shall be transferred to the above production departments. Cost of each production department i.e. total of direct and indirect departmental cost, shall be transferred to the next production department on the basis of quantity of output transferred out to next department. Annexure XII represents a Summary of all production costs for a cement factory as derived from Annexure I to XI. Important items of costs have been described in the following paragraphs: I(1) Raw Materials: Adequate records shall be maintained showing receipts issues, and balances, both in quantities and values of each of raw material required for manufacture of clinker or cement. The basis on which the value of receipts and issues have been calculated shall be clearly indicated in the cost records maintained or, if so desired by the company, in a separate manual of procedure, if any, maintained by the company or in foot-notes or separate explanatory notes to the cost statements for the relevant period. Such basis shall be applied consistently throughout the relevant period. The values shall include all direct charges upto works such as royalty, excise duty, haulage, transport, freight, handling and insurance: (a) All issues of production materials shall be reconciled in Annexures I to VIII, or in any form as near thereto as possible. Any losses or surpluses arising as a result of physical verification of inventories and adjustment thereof shall be clearly indicated in the cost records. Statutory records liable to be

maintained under Mining and Explosive Acts and rules may be considered adequate if they meet the requirements specified here. (b) Record of quarrying contracts, purchases and supply entered into with lessors and suppliers will be maintained showing the rate at which the various quantities of materials are to be supplied. The record shall indicate principal features of each contract, particularly conditions relating to the quality, price and period of delivery, discount for any transit losses and terms of payment including cash discounts, if any, and compensation the supplier shall pay for delay in delivery or non-delivery. The records shall also show the deliveries received against each contract of supply of materials till the contracted quantities are received in full. The lease and supply contracts shall also indicate the conditions relating to rebate for quality variations in chemical composition, colour and moisture content in case of limestone of particular quality, clay, shale and gypsum in case of white cement, iron slag in case of slag cement and in case of other materials usual quality standards shall be specified in the supply contracts for the purpose of rebates. Where some items of the raw materials are raised from mines owned or leased by the companies or are produced or manufactured by them, separate records showing the cost of raising, producing and manufacturing such raw materials shall be maintained in such detail as may enable the company to fill up the necessary particulars in the annexures or in proformae as near thereto as possible. Where such items of raw materials are obtained on the basis of supply contracts Anenxures I, II or III and not required otherwise, need not be maintained. The cost, in addition to the basic price of the materials shown in the records, shall also include all other direct charges incidental to the procurement of production materials and transporting the same up to the factory. In case of own quarry of lime stone, records of overburden raised shall be kept in terms of cost incurred. The basis of distributing the case of removal of overburden over the entire period of quarry working in the particular area shall be determined and consistently applied. Any wastage, whether in handling, transit, storage or in any other stage, shall be shown separately. The method of dealing with such losses in the calculation of cost shall also be indicated in the cost records. Realisable value of any waste material or by-product recovered or sale proceeds of any process material such as clinker shall be credited to the cost of such process to arrive at the net cost of cement. The records shall be maintained in such detail as may enable the company to compile the cost in the various annexures.
99
(c)
(d)
(e)
(f)
II-
Labour: (a) Adequate record shall be maintained to show the attendance of workers employed by the company whether on regular, temporary, or piece-rate basis or on contract basis, as the case may be. Proper record shall also be maintained in respect of payments made for overtime work and production incentives given to the workers. This will be done in a manner that labour cost is available for each cost centre. Fair and reasonable allocation shall be made for wages paid to such labour as has been utilised in more than one department, between the various departments or cost centres and the basis of such allocation shall be consistently followed. Reasons for idle time or lay-off payments shall be recorded alongwith the method of treatment in the calculation of the cost of the items referred to in sub-paragraph (2) of paragraph 1. Any wages paid for additions to plant and machinery or other fixed assets, shall be excluded from the cost of production. Benefits paid to the employees other than covered in (a) above shall be worked out separately and shown in the cost statement department-wise.
(b)
(c)

IIIFurnace Oil/Gas: (a) Adequate records shall be maintained to ascertain the cost of furnace oil/gas purchased and furnace oil/gas charged to different departments. In case the cost of furnace oil/gas is allocated to different departments on any basis other than the actual cost, reconciliation with the actual cost and the treatment of variances, shall be indicated in the cost records. Adequate record shall be maintained showing measurement of furnace oil before and after each filling in such a manner that quantity purchased is reconciled with the addition in stock on each filling. The records shall be maintained in such details as may enable the company to compile the cost data in the annexures.
100
(b)
(c)
IV-
Electric Power: (a) Adequate records, showing quantity and cost of electric power generated and purchased with fixed charges and duties incurred thereon, shall be maintained. Where electric power is generated by the company itself or by its wholly owned subsidiary or a sister concern, separate records shall be maintained in such details as may enable the company to compile cost data in Annexure X. The records shall be so maintained as to enable assessment of consumption of power by different departments or manufacturing units or cost centres. Allocation of cost of electric power shall be on the basis of actual consumption if separate meters are installed: or on the basis of technical estimates in the absence of separate meters. In the case of fixed charges or fuel adjustment surcharge claimed by KESC, WAPDA or any other supplier of electricity, irrespective of the actual power consumed and if the amount payable as per actual consumption falls below the contractual minimum, the difference between the contractual minimum and the actual amount shall be treated as fixed or period cost and transferred to Annexure XI. Cost of power consumed in and chargeable to non-manufacturing departments, if significant, shall be shown separately.
(b)
(c)
V-
Consumable Stores: (a) Record of each item of consumable stores shall be maintained to show receipts, issue and balances, both in quantities and values, required or actually used. Cost of consumable stores shall include all direct charges incidental to procurement of each item up to the factory. The cost of such stores consumed shall be charged to relevant departments on the basis of actual consumption. The items issued for capital expenditure, such as additions to plant and machinery, shall be shown under relevant capital expenditure heads and not in the cost statements. The requirements of Mining Act 1923 with relevant rules made thereunder, shall be fully compiled with. In the same manner, requirements of Explosives Act, 1884, and Explosive Rules, 1940, shall also be complied with as required in this behalf as far as acquisition, storage and consumption of explosives for quarrying purposes is concerned. Wastage of consumable stores, whether in transit, storage or at any point, shall be quantified and shown separately. Method of dealing with such losses in costing shall be indicated in the cost records.
(b)
(c)
(d)
VI-
Repairs and maintenance: Adequate records showing expenditure incurred on in-house repair and maintenance, and repair and maintenance through outside agencies shall be maintained. Records of workshop for quarrying of lime stone and clay shall be kept separately and costs charged to quarrying operation. Details of cost determination and

their basis of allocation of repairs and maintenance expenditure to different departments or manufacturing units or cost centres shall be indicated. Cost of work of capital nature, of heavy repairs, maintenance and overhaul cost, benefit of which is likely to spread over a period longer than one financial year shall be shown separately.
101
VII- Compressed air: Appropriate record of cost of compressed air incurred in connection with the generation of compressed air, if centralised and provided for the consuming departments, shall be maintained in sufficient details as may enable the company to compile the cost data to be charged as part of other manufacturing overheads in Annexure IX. VIII- Depreciation: (a) Adequate records preferably in the form of an annexure shall be maintained showing values and other particulars of fixed assets in respect of which depreciation is to be provided. The records shall inter alia indicate the cost of each item of asset, the date of its acquisition, its economic life and the rate of depreciation. Basis on which depreciation is calculated and allocated to the various departments and products shall be clearly indicated in the records. Amount of depreciation chargeable to different departments, manufacturing units or cost centres for the financial year shall be in accordance with the provisions of clause (F) of Part II of the Fourth Schedule to the Companies Ordinance 1984, and shall relate to the plant and machinery and other fixed assets utilised in such departments or units or cost centres. The method once adopted shall be applied consisten tly.
(b)
(c)
IX-
Insurance: (a) Record shall be maintained showing the insurance premia paid for the various risks covered on the assets and other interests of the company. Method of allocating insurance cost to the various departments shall be indicated in the cost records and followed consistently.
(b)
X-
Other Overheads: Overheads items which cannot conveniently be identified or apportioned over individual departments may be accumulated in Annexure XI and prorated over various departments on such basis or such one or more bases as may be deemed necessary. The basis or bases of apportionment shall be stated in the said Annexure.
XI-
Administration, selling and distribution expenses: Adequate records shall be maintained showing the items comprising administration, selling and distribution expenses and apportionment thereof to the different grades of cement if produced in the same factory. If clinker is being sold in addition to cement, the basis of allocation of these expenses shall be indicated in records. If only one grade of cement is being sold, the entire amount of administration, selling and distribution expenses may be allocated to that grade.
XII- Work-in-process and finished goods inventories:

Record of work-in-process inventories at each stage of process, quarrying, transportation, raw material crushing, stock hall, raw material mixing and grinding, clinkering, clinker grinding cement in soils and packing and storage shall be maintained and inventories will be physically checked and verified at the close of the financial period and duly reconciled with the books of accounts. Automatic data recording devices built into the crushing, mixing, clinkering and other plants, if available, may be utilised for reconciling in-put and out-put. Measurement of furnace oil will be done before and after each filling. Method of valuation of workin-process and the finished goods inventories shall be indicated in the cost records so as to reveal the cost elements which have been taken into account in such computation. The cost elements shall be related to the items referred to the Annexures. The costing method adopted shall be consistently followed. Treatment of differences, if any, on physical verification of stocks with book balances, shall also be indicated in the records. Special care shall be taken of moisture absorption and drying of limestone and clay because of weather conditions. XIII- Packing: (a) Adequate records as required for the purposes of Annexure VIII shall be maintained showing the cost of packing materials used and direct wages and other expenses incurred in respect of different types and weights of packages. In case of bulk supplies, necessary cost adjustments will be made. Adequate record shall be maintained showing quantity, rate and value of packing material charged to the cost of sale. Where packing material is produced in-house by the company, the record shall reflect the method of its valuation. In case packing material is purchased from a subsidiary or an associated company, the record shall disclose the name of such company and the purchase agreement with such company. The record shall show the purchase agreement with the supplier even if it is an outside company/party.
102
(b)
(c)
XIV- Statistical Statements and other records: Companies shall develop appropriate standards for use as a basis to evaluate performance. Quality reports based on standards of strength as per B.S.S. or other standards adopted by the industry may be maintained. Consumption ratios such as yield of explosives, furnace oil per ton of clinker, usage of clinker per ton of cement, percentage of gypsum, slag in cement, power consumption in terms of kwh for per ton of cement produced, etc., are also recommended to be worked out and compared with last year. XV- Reconciliation of cost and financial accounts: (a) If integrated accounts are not maintained, the cost records shall be periodically reconciled with the financial accounts to ensure accuracy. Variations, if any, shall be clearly indicated and explained. The reconciliation shall be done in such a manner that the profitability of each product produced and sold is correctly judged and reconciled with the overall profits of the company from all of its activities. Adequate cost records shall be maintained in a manner so that the cost statements may be compiled.
(b)
(c)
Exposure Draft of Third Revised Cost Audit Hand Book Annexure - I

DEPARTMENTAL COST STATEMENT (One sheet for each quarry item) Name of Department: LIMESTONE, CLAY GYPSUM, QUARRY FOR THE YEAR ENDED:____
103
A. Quantitative data
Opening stock at quarry, Quantity quarried Total: Quantity transported to crusher Stock adjustment (if any) Closing stock at quarry Reason for adjustment
For the Year:______ tonnes
Last year tones
Increase/decrease Over last year tonnes
B. Cost Statement
Cost
For the year
Last year
Rs. in 000
Direct Departmental Cost: Explosives (if any) Royalty and duties Labour cost. Salaries Employees other benefits Indirect materials Insurance Repair & maintenance Fuel oil Gas Depreciation (Annex..) Other overheads Sub-total: Indirect Departmental Cost: Compressed Air (Annexure IX) Power (Annexure X). Other factory expenses (Annexure XI). Sub-total: Total cost of the period Add: cost of opening stock Total cost of available stock:
Rs. Per tonne
Rs. In 000
Rs. Per tonne
C. Cost Distribution
Cost transferred to crusher Cost of closing stock Total cost accounted for
104
Annexure - II
DEPARTMENTAL COST STATEMENT Name of Department: TRANSPORTATION FOR THE YEAR ENDED:_____________________
Quantity transported from quarry iClay/shale iiLime Stone iiiGypsum. For the Year:______ tonnes Last year tonnes Increase/decrease tonnes
B. Cost Statement
Cost For the year Rs. in 000 Direct Departmental Cost: (a) Outside contract cost of transpiration: iiiiiiClay/Shale Lime Stone Gypsum Rs. Per tonne Last year Rs. In 000 Rs. Per tonne Increase/ decrease Rs. In Rs. Per tonne 000
Sub-total: (b) Own Transportation Cost: Duties (if any) Labour costs Salaries Employees other benefits Indirect material Insurance Repair and maintenance Fuel oil Greases Gas Tyres and tubes Depreciation (Annex) Other Overheads Sub-total: Indirect Departmental Cost: Compressed Air (Annexure IX) Power (Annexure IX) Other Factory Expenses Sub-Total: Total own transportation cost. (c) Total transportation cost.
C. Cost Distribution
Appointed to: iClay/Shale iiLime Stone iiiGypsum Total:

Annexure - III
DEPARTMENTAL COST STATEMENT Name of Department: RUSHING FOR THE YEAR ENDED:________
105
Clay/Shale tonnes Lime Stone tones For the year Last year Gypsum tonnes For the year Last year
Opening Stock (uncrushed material). Add: Received from quarry/purchase. Total available for crushing: Less: closing stock (uncrushed material). Crushed during the period. Add: Opening stock (Crushed material) Total crushed material: Less: Closing stock (crushed material) Stock reconciliation: Transferred to raw mill Stock adjustment
For the year
Last year
Total : For the year Last year
Rs. in 000
Direct Departmental Cost: Direct material (if any) Labour Cost Salaries Employees other benefits Indirect material Repair and maintenance Insurance Fuel oil Greases Gas Depreciation (Annex) Other Overheads Sub-total (a): Indirect Departmental Cost: Compressed Air (Annexure IX) Power (Annexure IX) Other Factory Expenses Sub-total (b): Total Cost (a+b):
Rs. Per tonne
Rs. In 000
Rs. Per tonne
Exposure Draft of Third Revised Cost Audit Hand Book C- Cost Distribution
(On time or other appropriate basis) For the year Last year
106
Rs. in 000
Clay/Shale Lime Stone Gypsum.
D- Cost Transferred and Cost of Closing
Rs. Per tonne
Rs. In 000 Rs. Per tonne
Stock cost summary Clay/Shale Lime Stone Gypsum a- Opening Stock (Uncrushed). b- Cost received (during the year) c- Total cost for uncrushed material (a+b) d- Cost applicable (uncrushed) to closing stock
e- Cost applicable to crushed material (c-d). f- Cost of crushing process (from above). g- Opening stock (crushed material). h- Total cost applicable to crushed material (e+f+g) ijClosing stock (crushed material) Cost transferred to stock hall (Raw material storage) (h-I)
107
Annexure - IV
DEPARTMENTAL COST STATEMENT Name of Department: STOCK HALL STORAGE/ISSUAGE OF RAW MATERIAL FOR THE YEAR ENDED:________
Clay/Shale tonnes Lime Stone tones Gypsum tonnes
Opening Stock Received from crusher Purchased. Total Issued to mix/slurry Stock adjustment Closing stock.
For the year
Last year
For the year
Last year
For the year
Last year
B- Cost Statement:
For the year Rs. 000 per tonnes Labour cost: Salaries Employees other benefits Indirect material Repair and maintenance Insurance Fuel-oil Gas Depreciation (Annex) Other Overheads (Annex) Sub-Total (a): Indirect Departmental Cost: Compressed Air (Annexure IX) Power (Annexure IX) Other Factory Expenses Sub-total (b): Total Cost (a+b): Last year Rs. 000 per tonnes

C- Cost Distribution
Quality issued to Raw Mill (Tonnes) Cost of Stock Hall Applicable to issues Cost Applicable to closing stock
108
Rs. in 000
Clay/Shale. Lime Stone Gypsum Total
Rs. Per tonne
Rs. In 000
Rs. Per tonne
D- Cost Summary (Upto Stock Hall Stage) Cost transferred and cost of closing stock:
Clay Shale Lime Stone Gypsum Total
Rs. 000
Quantity Received (Tonnes) Quantity Issued (Tonnes) Opening Stock Add: Received from Crusher/purchases. Stock Hall Cost Total:
Less:
Per tonne
Rs. 000
Per tonne
Rs. 000
Per tonne
Cost of Closing stock Cost Applicable to Quantities Issued to Raw Mill.
109
Annexure - V
DEPARTMENTAL COST STATEMENT
(Separate sheet for wet/dry process) Name of Department: RAW MILL (FOR MIX/SLURRY) FOR THE YEAR ENDED:________
Opening Stock Received from stock. Total: Issued for Mix/Slurry Total Mix/Slurry made Mix/Slurry transferred to clinkering Stock adjustment Closing stock
A. Quantitative data Clay/Shale tonnes For Last year the year
Lime Stone tones For Last year the year
Mix/Slurry tonnes For Last year the year
B- Cost Statement:
For the year Last year
Rs. 000 per tonnes

Direct Material: 1- Opening stock 2- Received from stock hall 3- Total 4- Closing stock Cost of raw materials processed (3)-(4) Cost of opening stock Direct Departmental Costs Materials added eg. Laterite Labour Salaries Employees other benefits Grinding material Lining plates Indirect material Repair and maintenance Water
Rs. 000 per tonnes

Fuel-oil Gas Depreciation (Annex) Other Overheads Sub-Total (a): Indirect Departmental Cost: Compressed Air (Annexure IX) Power (Annexure IX) Other Factory Expenses (Annexure IX) Sub-total (b): Total Cost (a+b):
110
For the year
Last year
Rs. in 000
Transferred to Kiln Closing stock of mix/slurry Total:
Rs. Per tonne
Rs. In 000
Rs. Per tonne
111
Annexure - VI
(Separate sheet for wet/dry process Clinker) Name of Department: KILN FOR THE YEAR ENDED:___________
A. Quantitative data For the year tonnes

Opening Stock Quantity received from Raw Mill. Total: Quantity fed into (the) Kiln. Stock adjustment Closing stock Clinker produced Opening stock clinker Total: Clinker transferred to Grinding Clinker sold Stock adjustment Closing stock of clinker. Total:
Last year
tonnes
B- Cost Statement:
Rs. in 000
Cost received from Raw Mill: 1- Opening stock 2- Received during the year 3- Total 4- Closing stock Cost to be charged to the process (3)-(4). Direct Departmental cost: Material added (if any). Labour Salaries Employees other benefits Indirect materials. Fuel-oil Gas Repair and maintenance Depreciation (AnnexX) Other Overheads Sub-Total (a):
Rs. Per tonne
Rs. In 000
Rs. Per tonne

Indirect Departmental Cost: Compressed Air (Annexure IX) Power (Annexure IX) Other Factory Expenses (Annexure IX) Sub-total (b): Total Cost (a+b): Less: value of clinker sold (if any)
112
For the year
Last year
Rs. in 000
Cost transferred to Grinding Cost of Closing stock of Clinker Total:
Rs. Per tonne
Rs. In 000
Rs. Per tonne
113
Annexure - VII
Name of Department:
GRINDING (CEMENT) FOR THE YEAR ENDED:___________
For the year tonnes
Opening Stock (Clinker) Clinker received from kiln. Total: Clinker fed into grinding Stock adjustment. Closing stock of clinker. Tonnes Opening stock of cement Cement produced. Cement produced as % of input Cement transferred to silos. Stock adjustment Closing stock of cement. Tonnes
Last year
tonnes
B- Cost Statement:
For the year Rs. in 000
Cost received from Kiln: 1- Opening stock 2- Received during the year for clinker 3- Total cost of clinker. 4- Cost of Closing stock of (Clinker) Cost of clinker fed to Grinding process (3)-(4). Direct Departmental cost: Material added
Last year Rs. Per tonne
Rs. Per tonne Rs. In 000

Gypsum Slag Others Royalty/duties Labour Salaries Employees other benefits Indirect materials. Repair and maintenance Grinding materials Lining plates Fuel-oil Gas Depreciation (AnnexX) Other Overheads Sub-Total (a): Indirect Departmental costs: Compressed air (Annex IX) Power (Annex X) Other factory expenses (Annex XI) Sub-Total (b) Total cost (a+b)
114
Cost transferred to silos Cost of closing stock of cement. Total
115
Annexure - VIII
Name of Department: PACKING & STORAGE FOR THE YEAR ENDED:___________
A. Quantitative data For the year tonnes

Opening Stock of cement (un-packed) Add: Cement received from Grinding Deptt. Total: Less: Closing stock of cement (unpacked) Cement packed during the period (No. of bags) Less: Quantity sold (No. bags).
Closing stock of cement (packed) No. of bags)
Last year tones
Stock adjustment (if any) (No. of bags)
B- Cost Statement:
For the year Rs. Rs. Per in 000 tonne Last year Rs. In 000 Rs. Per tonne
Cost opening stock un-packed:

Cost transferred in from cement grinding department.
Direct Departmental cost Packing material Other materials Labour Salaries Employees other benefits Indirect materials. Repair and maintenance Fuel-oil Gas Depreciation (AnnexX) Other Overheads Sub-Total (a): Indirect Departmental costs: Compressed air (Annex IX) Power (Annex X) Other factory expenses (Annex XI) Sub-Total (b) Total cost (a+b) Less:Cost applicable to un-packed closing stock Cost applicable to packed closing stock Balance: Cost of packed cement sold:_______ Cost of loose cement sold Sold. (if any): _______ Cost transferred to silos Cost of total cement sold.
116
Annexure - IX
DEPARTMENTAL COST STATEMENT Name of Department: AIR COMPRESSING FOR THE YEAR ENDED:___________
For the year tonnes
Compressed Air Produced Last year
tonnes
B- Cost Statement:
Direct Departmental Cost: Labour Salaries Employees other benefits Insurance Indirect materials. Repair and maintenance Fuel-oil Gas Depreciation (AnnexX) Purchased Power Other Overheads Sub-Total (a): Indirect Departmental costs: Power (Annex X) Other factory expenses (Annex XI) Sub-Total (b) Total cost (a+b)
Quantity Departments using compressed air: Cost
117
Annexure - X
DEPARTMENTAL COST STATEMENT STATEMENT SHOWING THE COST OF POWER GENERATED/PURCHASED AND CONSUMED DURING THE YEAR ENDED:___________
For the year
Installed capacity KWH. No. of Units generated No. of units purchased Total: Self-consumption in power house Losses: Net units consumed by various other department: 12Percentage of loss to total power generated and purchased. % of power generated to installed capacity.
Last year
B- Cost Statement:
Qty. Units S.No. Particular Rate Rs. Amount Rs. Cost per unit of power generated and purchased Current year Previous year
12345678Total
Fuel oil/steam consumed Other material (specify) Consumable stores Other direct charges Salaries and wages Repairs and maintenance Other overheads Depreciation.
Less: (1) Supplies to other units of the company (Not engaged in the manufacture of cement)
Net cost of Power generated. Purchased power (on actual consumption basis)
Total cost of power: Cost per unit (average).
Exposure Draft of Third Revised Cost Audit Hand Book C- Cost Distribution
Consumed in:Lime stone, clay, gypsum Quarry Transportation Crushing Stock hall Raw mills Kilns Cement grinding Storage and packing Air compressing Others.
118
Total cost distribution:
Notes:
(a) (b)
Cost per unit generated should be worked out with reference to net quantity of power available after deducting consumption in the power house and other losses. When meters are not installed consumption by different departments shall be assessed on a reasonable basis and applied consistently.
119
Annexure - XI
OTHER FACTORY EXPENSES-FACTORY GENERAL FOR THE YEAR ENDED:___________
A. Cost Statement
For the year
Direct Departmental Cost : Labour cost Salaries Employees other benefit Contrctors labour Depreciation Stores and spares Repair and maintenance Electricity Compressed Air (Annexure IX) Power (Annexure X). Miscellaneous Expenses. (Tele printing stationery, T.A./D.A., rates and taxes, insurance and fixed charges paid to WAPDA Flowers, seeds, plants, cleanliness materials, uniform of security staff etc.) Last year
B- Cost Distribution:
S.No.
Particular
Basis
Rs. In 000
Basis
Rs. In 000
Lime stone, Clay, Gypsum, Quarry Transpiration Crushing Stock hall Raw Mill Cement Grinding Packing and Storage Air Compressing (if any) Power generation (if any) Total
Exposure Draft of Third Revised Cost Audit Hand Book Annexure - XII
SUMMARY COST REPORT FOR THE YEAR ENDED _____________________
Department Power House, Rs. Departmental Cost Opening For the period Total Cost Allocation/Transfer in (out) Power House Compressed Air Factory General Quarry Transportation Crushing Stock Hall Raw Mill Kiln Grinding Packing and Storage Total : Cost of Closing Stock: Cost of Goods Sold Total : Quantity Sold/Produced Closing Stock :Compressed Air Rs. Factory General Rs. Quarry Transportaion, Rs. Crushing Stock Hall Rs. Raw Mill Rs. Kiln Grinding Packing and Storage Rs. Total
120
Rs.
Rs.
Rs.
Rs.
Rs.
121
APPENDIX V Sugar Industry (Cost Accounting Records) Order, 2001

The Gazette of Pakistan
122
Extraordinary Published by Authority

Islamabad, Wednesday, February 14, 2001
PART II
Statutory Notifications (S. R. O.)

Securities and Exchange Commission of Pakistan NOTIFICATION
Islamabad, the 13th February, 2001
S.R.O. 97(I)/2001.- In exercise of powers conferred by clause (c) of sub-section (1) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984), and clause (o) of sub-section (4) of section 20 of the Securities and Exchange Commission Act, 1997 (XLII of 1997), the Securities and Exchange Commission of Pakistan is pleased to make the following Order, namely:-
Sugar Industry (Cost Accounting Records) Order, 2001

1. Short title, application and commencement:- (1) This order may be called the Sugar Industry (Cost Accounting Records) Order, 2001. (2) This Order shall apply to every company engaged in production of sugar in any form except liquid sugar. It shall come into force at once.
(3) 2.
Maintenance of Records.- (1) Every company to which this order applies shall, in respect of each financial year commencing on or after the commencement of this order, keep cost accounting records, containing, inter-alia, the particulars specified in Schedules I, II and III to this Order. (2) The cost accounting records referred to sub-para (1) shall be kept in such a way as to make it possible to calculate from the particulars entered therein, the cost of production and cost of sales of white sugar separately, during a financial year. Where a company is manufacturing any other product in addition to sugar, the particulars relating to the utilization of materials, labour and other items of cost in so far as they are applicable to such other product, shall not be included in the cost of sugar. It shall be the duty of every person referred to in sub-section (7) of Section 230 of the Companies Ordinance, 1984 (XLVII of 1984), to comply with the provisions of sub-paragraphs (1) to (3), in the same manner as they are liable to maintain books of financial accounts required under Section 230 of the said Ordinance.
(3)
(4)

3. Penalty. If a Company contravenes the provisions of this order, such company and every officer thereof referred to in sub-paragraph (4) of paragraph 2, shall be punishable under sub-section (7) of section 230 of the Companies Ordinance, 1984 (XLVII of 1984).
123
SCHEDULE I
[See paragraph 2(1)]
I. Materials
(i) Direct Materials: (a) Adequate records shall be maintained showing separately the quantity and cost of sugar-cane procured at the factory gate or other collection centers. Where sugar-cane is grown in farms owned or taken on lease by a company, detailed records shall be maintained in a suitable proforma so as to enable computation of the cost of such sugar-cane. The rate fixed by the Government from year to year adopted for pricing the sugar cane supplied by the sugar cane grower (growers) to the sugar mill shall be indicated in the cost records. Where beet is used as raw material for the production of sugar, separate records shall be maintained on the lines similar to sugar-cane. A separate proforma shall be maintained to record sugar-cane and beet procurement expenses along with other related expenses. These expenses shall be separately determined. All issues of materials shall be reconciled with figures shown in Annexures to Schedule III to this Order, or in any other form as near thereto as possible. Any losses or surpluses arising as a result of physical verification of inventories and adjustments thereof shall be clearly indicated in the cost records. Record of purchase and supply through indent by suppliers shall be maintained showing the rates at which the various quantities of material are to be acquired. The records shall indicate principal features of each indent particularly conditions relating to quantity, quality, price, period of delivery and discounts. If the quantity and value of material consumed in a company are determined on any basis other than actuals for example at standards, the method adopted shall be mentioned in cost records and followed consistently. The overall reconciliation of such quantities and values of material with the actuals shall be made at the end of the financial year explaining the reasons for variances. The treatment of such variances in determining the cost of items referred to in para 2 shall be indicated in the cost records. The records shall be maintained in such detail as may enable the company to readily provide data required in the various Annexures to Schedule III, to this Order in a verifiable state.
(b)
(c)
(d)
(e)
(f)
(g)
(ii)
Process material: Adequate records shall be maintained to show the receipts, issues and balances, both in quantities and costs of each item of the process material such as lime, sulphur, super phosphate, caustic soda, filter cloth and other chemicals. The cost shall include all direct charges up to works, wherever specifically incurred. The issues of material shall properly be identified with the departments or cost centers.

(iii) Consumable stores, small tools, machinery spares etc. (a) Adequate records shall be maintained to show the receipts, issues and balances, both in quantities and cost of each item of consumable stores, small tools and machinery spares. The costs shown shall include the direct charges up to works, wherever specifically incurred. In case of small tools, the costs of which are insignificant, the company may maintain such records for the main groups of such items. The cost of issues of consumable stores, small tools and machinery spares, shall be charged to the relevant heads of accounts such as repairs to plant and machinery, or repairs to building. Material consumed on capital works such as addition to buildings, plant and machinery and other assets shall be shown under the relevant capital heads.
124
(b)
(c)
(iv)
Wastages, spoilages, rejections or losses etc.: Adequate records shall be maintained showing the quantity and cost of wastages, spoilages, rejections and losses of sugar-cane and other raw material, process material, consumable stores, small tools and machinery spares, whether in transit, storage, or for any other reasons. The method followed for adjusting the above losses as well as the income derived from the disposal of scrap, if any, in determining the cost of the product shall be disclosed in such details as may enable the company to arrive at the net cost of white sugar produced.
II.
Excise Duty and Sales Tax
Adequate record of excise duty and sales tax paid and the rebate claimed or earned in case of allowance for excess production or export of sugar shall be maintained along with the record of white sugar manufactured. Calculation for rebate shall be worked out through formula prescribed by the Government. The working of the adjustment or claim, if any, shall also be shown.
III. Salaries and Wages

(a) Adequate record shall be maintained to show the attendance of workers employed by the company whether on regular, seasonal, temporary, or on contract basis, as the case may be. Proper record shall also be maintained in respect of payment made for overtime work and production incentives whether in the shape of production bonus or incentives based on output given to the workers. Payment of any retirement benefits including pension, provident fund, gratuity , old age benefits, contribution and any welfare expenses shall also be included in the labour or factory overhead cost of beneficiary cost center/ department. This will be done in a manner that labour cost is available for each cost center or department and for each product whether by-product or main product so that different Annexures of Schedule III to this order, are filled properly and easily. Fair and reasonable allocation shall be made for wages paid to such direct labour as has been utilized in more than one department, between the various departments or cost centers and the basis of such allocation shall be consistently followed. Idle time or lay-off payments shall be recorded separately indicating the reasons and the method of treatment in the calculation of the cost of the items referred to in Para 2. Any wages paid for additions to plant and machinery or other capitalised assets, shall be capitalized and excluded from the cost statements of white sugar produced. Benefits paid to the employees other than covered in clause (a) above shall be worked out separately and shown in the cost statement department wise.
(b)
(c)
IV.
Service / Departments

Adequate records shall be maintained to indicate the expenses incurred for each services department or cost center. In the case of multi-product companies, these expenses shall be apportioned to other service and production departments on an equitable basis. Where these service departments serve products other than white bagged sugar, suitable basis shall be worked out so that the share apportioned to white bagged sugar is worked out and applied consistently.
125
V.
(i)
Utilities
Steam.- Adequate records showing the quantity and cost of steam raised and consumed shall be maintained in such detail as may enable the company to fill up the necessary particulars in Annexure 7 to schedule II to this Order. The cost of steam consumed by the sugar mill and other units of the company shall be calculated on a reasonable basis and applied consistently. The cost of steam should be allocated to electric power house, white bagged sugar and other users including staff colony and office building etc. Basis adopted for valuation of steam at different pressures shall also be indicated in the records. Electric Power.- Adequate record of cost of electric power generated by the company and purchased shall be kept in such details as may enable the company to furnish the necessary cost data as in Annexure 8 to Schedule III to this Order. The records shall be so maintained as to enable assessment of consumption of power by different departments or production units or cost centers. Allocation of cost of electric power shall be on the basis of actual consumption, if separate meters are installed; or on the basis of technical estimates in the absence of separate meters. In the case of fixed charges or fuel adjustment surcharge claimed by the utility company, irrespective of the actual power consumed and if the amount payable as per actual consumptions fall below the contractual minimum, the difference between the contractual minimum and the actual amount shall be treated as fixed or period cost and transferred to other factory expenses statement [Annexure 9 of Schedule III]. Cost of power consumed in and chargeable to non-production departments, if significant, shall be shown separately. Record shall also be kept for any electric power sold to out-side agencies.
(ii)
Note: In case of self-generation quantity and reasons for under utilization shall be specified and the relevant cost shall be treated as fixed or period cost.
VI.
Repairs and Maintenance
Adequate records showing the expenditure incurred on workshop facilities for repairs and maintenance of buildings, civil works, offices and plant and machinery in different departments and cost centers shall be maintained on regular basis. Details of costs incurred and the basis of allocation of repairs and maintenance expenditure to different departments or production units shall be indicated. Cost of work of capital nature, heavy repairs, and overhaul cost, benefit of which is likely to be spread over a period longer than the financial year, shall be shown separately. If a separate maintenance team is working for a particular department, the salaries, wages, cost of consumables, spares and tools shall be charged as direct expense of that department. If the maintenance services are utilized for other products, the portion utilized for them shall be segregated and charged thereto.
VII. Depreciation
(a) Adequate records shall be maintained showing values and other particulars of fixed assets in respect of which depreciation is to be provided. The records shall, inter alia, indicate the cost of each item of asset, the date of its acquisition, accumulated depreciation, the rate of depreciation and the depreciation charged, for the relevant period. Basis on which depreciation is calculated and allocated to the various departments and products shall be clearly indicated in the records.
(b)

(c) Amount of depreciation chargeable to different departments, production units or cost centers, for the financial year shall be in accordance with the provisions of clause (F) of Part II of the Fourth Schedule to the Companies Ordinance, 1984, and shall relate to the plant and machinery and other fixed assets utilized in such departments or units or cost centers. The method once adopted shall be applied consistently.
126
VIII. Insurance
(a) The record shall be maintained showing the insurance premia paid for the various risks covered on the assets and other interests of the company. Method of allocating insurance cost to the various departments shall be indicated in the cost records and followed consistently.
(b)
IX. Other Overheads

Adequate records showing the amounts comprising the manufacturing overhead expenses other than those already mentioned and details of apportionment thereof to the various departments or processes shall be maintained. If products other than white bagged sugar are also being produced in the factory, adequate basis should be developed to apportion the overhead cost equitably.
X. By-Products
Detailed records shall be maintained for each item of by-product showing the production, disposal and balance both in quantity and value. The basis adopted for valuation of the by-products shall be equitable and consistent. Records indicating the actual sales realisation of by-products shall also be maintained.
XI. White Sugar Transferred for Self Use

Adequate records shall be maintained showing the quantity and cost of white sugar transferred to other units of the company for self consumption. The rate at which such transfers are affected shall be disclosed in the cost records.
XII. Work-In-Process and Finished Goods Stock

The method of valuation of work-in-process and finished goods stock shall be indicated in the cost records so as to reveal the cost elements that have been taken into account in such computation. The cost element shall be related to the items referred to in the relevant Annexures to Schedule III to this Order. The costing method adopted shall be consistently followed. Treatment of differences, if any, on physical verification of stocks with book balances, shall also be indicated in the cost records.
XIII. Adjustment of Cost Variance

Where the company maintains cost records on any basis other than actuals, such as standard costing, the records shall indicate the procedures followed by the company in working out the actual cost of the product under such systems. The method followed for adjusting the cost variances in determining the actual cost of the product shall be indicated clearly in the cost records. The reasons for the variances shall be indicated in detail in the cost records.
XIV. Inter-Company Transactions

In respect of supplies made or services rendered by the company to its holding company or a subsidiary of a company in the same group or company in which a director of the company is also a director in such companies and vice versa, records shall be maintained showing contracts entered into, agreements or understandings reached, in respect of:-

(a) (b) (c) (d) Purchase and sale of raw materials and process material; Utilisation of plant facilities; Supply of utilities; and Administrative, technical, managerial and other consultancy services.
127
These records shall indicate the basis followed to arrive at the rates charged between them so as to enable determination of the reasonableness of the rate charged or paid for such services.

XV. Reconciliation of Cost and Financial Accounts
(a) If integrated accounts are not maintained, the cost records shall be periodically reconciled with the financial accounts to ensure accuracy. Variations, if any, shall be clearly indicated and explained. The reconciliation shall be done in such a manner that the profitability of each product produced and sold is correctly judged and reconciled with the overall profits of the company from all of its activities. Adequate cost records shall be maintained in a manner so that the cost statements may be properly compiled.
128
(b)
(c)
XVI. Statistical Records

(a) Data such as the duration of crushing period, the quantity of each grade of white sugar produced, mill stoppages during the season indicating the reasons, quantity of by-products obtained, percentage of sugar balance, bagasse, press-mud, molasses and sugars shall be kept in detail. The data maintained in the cost records shall be reconciled with the periodical returns submitted by the company to excise and other authorities. Companies may develop an appropriate standard for use as a basis to evaluate performance properly. COMPANY INFORMATION 1. 2. 3. 4. 5. 6. B.
S.No (1) 1 (a)
(b)
(c) A.
Name of the Company. Date of Incorporation. Location of Registered Office. Location of Factory/Factories. Products other than sugar being manufactured. Installed Cane Crushing Capacity in tonnes.
PRODUCTION DATA
Particulars (2) CANE CRUSHED Date of start Date of Finish Duration of run days Total number of hours in duration Total number of hours of actual crushing Total numbers of hour lost Total cane milled (tonnes) Converted maunds Total mixed juice obtained (tonnes) GUR MELTED JUICE & ADDED WATER Average mixed juice % cane Average added water % cane SAGAR MADE Current Year (3) Previous Year (4)
(b) 2

Total sugar bagged of all grade (100 kg) ( 50 kg) Sugar bagged (tonnes) Sugar in process (tonnes) 4 MOLASSES EXTRACTED Total molasses sent out (tonnes) Molasses in process (tonnes) RECOVERY % Laboratory test percentage recovery of sugar cane Average recovery of marketable white sugar % cane Average production of final molasses % cane BY- PRODUCTS Bagasses % cane (calculated) (tonnes) V.F. Cake % cane (tonnes) CLARIFICATION PROCESS Specify the process used by the mill
129
Exposure Draft of Third Revised Cost Audit Hand Book SCHEDULE III
Annexure 1. [see para 2(1)] STATEMENT SHOWING COST OF PRODUCTION & SALE OF WHITE BAGGED SUGAR FOR THE YEAR ENDED ________
Opening Stock Production Closing Stock Sales S.No (1) 1 (M.Ton) (M.Ton) (M.Ton) (M.Ton) Particulars (2) Raw Materials a) Sugar Cane (Annex 3) b) Beet (Annex 4) c) Gur d) Raw Sugar e) Process Material (Annex 5) Salaries/Wages and benefits (Annex 6) Consumable Stores Repairs and maintenance Utilities Steam (Annex 7) Electric Power (Annex 8) Water & Gas Insurance Depreciation Other Factory Overheads (Annex 9) Total Cost ADD : Opening Stock of W.I.P. LESS : Closing Stock of W.I.P. Total Cost of goodsManufacturing Less: Realisable value of By-Products Molasses Bagasse Others Net Cost of goods Manufacturing: Add: Packing Material & Handling Net Cost of Bagged Sugar Add: Excise Duty / sales tax Total Cost of Bagged Sugar: Add: Opening Stock of Sugar Less: Closing Stock of Sugar Cost of Sales Administrative Expenses (Annex 10) Selling & Distrib. Expenses (Annex 11) Financial Expenses Other Charges Total Cost to Make and Sell Quantitative Data Bagged Sugar
130
Current Year Amount Cost per Ton of Rs Sugar
Previous Year Amount Cost per Ton of Rs. Sugar
2 3 4 5 6 7 8 9 10 11 12 13 14 15
16 17 18 19 20 21 22 23 24 25 26

Annexure 2
STATEMENT SHOWING COST OF SUGARCANE PRODUCED
131
FOR THE YEAR ENDED ______

Current Year Quantity Amount Rs Rs (3) (4) Previous Year Quantity Amount Rs. Rs (5) (6)
S.No (1) 1
Particulars (2) Seeds and Other inputs Seed Fertilizers, herbicides etc. Insecticides Abiana/Water Charges Total Cost of Inputs Labour Cost Land preparation Plantation Maintenance of cane crop/ratoons Operation of Tractors Harvesting Total Labour Cost Other Cost Fuel for Tractors operation Maintenance and over haul of Tractors Insurance Interest expenses Depreciation of equipments Rent of agriculture equipments (if any) Total Other Costs Total Cost of own production (1+2+3) Sales value at controlled price Profit/Loss on own production
Note: 1. 2.
This Annexure will be prepared by those enterprises which cultivate sugarcane on their own farms. Similar Annexure will be prepared by those enterprises which cultivate beet on their own farms.

Annexure 3
STATEMENT SHOWING COST OF SUGARCANE CRUSHED FOR THE YEAR ENDED ______
Current Year Rate Rs./M. Amount Ton Rs. (4) (5) Previous Year Quantit Rate y M. Rs./M. Amou Ton Ton nt (6) (7) Rs. (8)
132
S. No. (1) 1.
Particulars (2)
Quantit y M. Ton (3)
2. 3. 4. 5.
6.
Total sugarcane purchased at Government fixed rate Sugarcane produced from own farm (Annex 2) Less: Loss in transit Sugarcane received at factory gate Commission Quality premium Loading/unloading charges Cane development expenses: a) Salaries and Wages of Supply and Development Staff b) Sugarcane Development Research c) Supply staff and transportation expenses d) Other expenditure Taxes and Levies: a) Cane cess/ purchase tax b) Market committee fee c) Road cess d) Octroi e) Other levies Transportation Charges a) Delivery expenses b) Transport subsidy c) Others Other Expenditures at Cane Collection Centers a) Salaries and Wages b) Stores c) Repairs and Maintenance d) Others Total cost of SUGARCANE Transferred to production processes (Annex 1) Notes: 1. Cane supplied from own farm shall be charged at controlled rate & the profit/loss on farm shall be taken to profit &loss account directly. 2. All expenses relating to own farm shall be excluded from this Annexure. 3. Where beet is used in addition to sugarcane, separate Annexures shall be maintained on similar lines for beet also.
7.
8.
133
Annexure 4
STATEMENT SHOWING COST OF BEET CONSUMED FOR THE YEAR ENDED ______ Current Year Rate Amount Rs./M. Rs. Ton (4) (5) Previous Year Rate Rs./M. Amount Ton Rs. (7) (8)
S. No. (1) 1.
Particulars (2) Total beet purchased at Government fixed rate Less: Loss in transit Beet received at factory gate Commission paid Loading unloading Beet development expenses: a) Salaries and Wages of Supply and Development Staff b) Sugar Development Research c) Supply staff and transportation expenses d) Other expenditure Taxes and Levies (if any) a) Purchase tax b) Market committee fee c) Road cess d) Octroi e) Other levies
Quantity M. Ton (3)
2. 3. 4.
5.
6 .
7.
Transportation Charges a) Delivery expenses/travelling purchases centre to mill gate b) Transport subsidy c) Others
from
Other Expenditures at Beet Collection Centers a) Salaries and Wages b) Stores c) Repairs and Maintenance d) Others Total cost of BEET Transferred to production processes (Annex 1) Notes: 1 Beet supplied from own farm shall be charged at controlled rate & the profit/loss on farm shall be taken to profit & loss account directly. 2. All expenses relating to own farm shall be excluded from this Annexure. 3. Where sugarcane is used in addition to beet, separate Annexures shall be maintained on similar lines for sugarcane also.
134
Annexure 5 STATEMENT SHOWING COST OF PROCESS MATERIAL CONSUMED FOR THE YEAR ENDED ________________
S.No (1) Particulars (2) Current Season Amount Cost per Rs Ton of Sugar Previous Season Amount Cost Rs. per Ton of Sugar
Total Sugar Produced (M-Tons) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Unslaked Lime Phosphoric Acid Filter Acid Sulphur Caustic Soda Soda Ash Tri sodium Phosphate Bleaching Powder Anti Foam Formaline Laboratory Chemicals Filter Cloth Sewing Thread Cleaning Brushes Lubricant and Grease Other (Specify) Total Less allocated to (a) Electricity generation (b) Steam Generation (c) Raw Material (d) Admin Expenses (e) Selling and Distribution Expenditure (f) Any Other Specify Balance transferred to production process Annexure 1.

Annexure 6
STATEMENT SHOWING COST OF SALARIES, WAGES AND BENEFITS
135
FOR THE YEAR ENDED ____________________

S.No Particulars Current Year Amount Cost per Ton Rs of Sugar (4) (3) Previous Year Amount Cost per Rs. Ton of Sugar (5) (6)
(1)
(2) Total Sugar Produced (M-Tons) Cost
1. (i) (ii) (iii) (iv) 2. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)
Salaries/Wages: Officers and Permanent Staff Seasonal Staff Daily rated and Contract Labour Bonuses Benefits: Medical Expenses Canteen Expenses Welfare, Recreation Transport and Travelling Education Cess/Expenses Group Insurance/Workmen Comp. Insurance Prov. Fund (Employers Contribution) Gratuity/Pension Other Benefits (if any) Total Less allocated to(a). Electricity Generation (b). Steam Generation (c). Raw Material (d). Admin Expenses (e). Selling & Distribution Expenses (f). Any Other Specify Balance transferred to production process (Annexure)

Annexure 7 STATEMENT SHOWING COST OF STEAM/GENERATED CONSUMED FOR THE YEAR ENDED ______
S.No (1) Particulars (2) Unit (3) Current year (4) Previous Year (5) Variance (6)
136
1. 2. 3. 4.
5.
Types of steam boilers used No. of days worked Installed Capacity (steam in tonnes) Utilised capacity (steam in tonnes) Production: a) High pressure steam b) Medium pressure steam c) Low pressure steam d) Less: transit losses e) Total Percentage of capacity utilization (3/2 * 100)
Current Year Rate per Unit Rs. (4) Previous Year Rate per Unit Rs. (7) Amount Rs. (8)
S. No. (1) 1. 2.
Particulars (2) Water Fuels: a) Bagasse (i) Own (ii) Purchased b) Pith c) Coal purchased d) Furnace Oil e) Fire Wood f) Gas g) Other fuels, if any (to be specified) Quantity of waste heat from the plant, if any Consumable stores Direct salaries, Wages and benefits Repairs and Maintenance Other direct expenses (e.g. Boiler inspection fee etc.) Insurance Depreciation Total Cost of Steam Raised Less : Outside sale Total Cost of Steam for Self Consumption Add: Cost of steam purchased Total Cost of Steam Consumed ALLOCATION Total of item 12 allocated to i) White bagged sugar ii) Electric power house iii) Others: a) Staff colony b) Office building etc.
Quanti ty (3)
Amount Rs. (5)
Quantity (6)
3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Total
Notes: 1. 2 3. 4. The rate at which waste heat is evaluated vide item 3 of this annex should be indicated giving details of cost centre from which transferred. Basis adopted for valuation of steam at different pressures be also indicated in the records. Realisations, if any, by sale of steam to outside parties and waste products such as boiler ash shall be shown separately against item 10. Where meters are not installed, consumption of steam shall be assessed on a reasonable basis and applied consistently.

Annexure 8
STATEMENT OF COST OF ELECTRIC POWER PURCHASED / GENERATED & CONSUMED
137
FOR THE YEAR ENDED ______

S. No.
1. 2. 3. 4. 5. 6. 7. 8.
Description
Installed Capacity (KWH) No. of units generated (KWH) No. of units purchased (KWH) Total (2+3) Consumption in Power House including other losses Net units consumed (4-5) Percentage of Consumption and losses to total units Available =5/4* 100 Percentage of power generated to installed capacity 2/1 * 100
Current Year
Previous Year
Variance
Current Year S. No. (1) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Particulars (2) Steam (Annex 7) Consumable Stores Salaries and Wages Other direct expenses Repairs and maintenance Duty on electricity Depreciation Total Less: a) Credit for exhaust steam used in process etc. b) Other credits, if any Cost of power generated Less: Cost of power sold Add: Cost of power purchased Total net cost of power consumed Cost per unit average ALLOCATIONS Total at item 12 allocated to: e) White bagged sugar ii) Self consumption iii) Others: a) Staff colony b) Office building c) Other (specify)
Total
Rate Rs./M. Ton (4)
Amoun t Rs. (5)
Previous Year Rate Quantit Rs./M Amou y M. . Ton nt Ton (7) Rs. (6) (8)
Notes: .1, Credit for the cost of exhaust steam supplied to the sugar factory and for other units shall be determined on a reasonable basis and shown against item 8(a). 2. Realisation, if any, by sale of steam to outside parties, etc. shall be shown separately against item 8(b). 3. Cost per unit shall be worked out with reference to the net units of power available for use after deducting consumption in the power house and other losses.

Annexure 9
STATEMENT SHOWING OTHER FACTORY OVERHEADS FOR THE YEAR ENDED _________
S.No Description Amount in Rupees Current Year Amount Rs Total Sugar Produced (M-Tons) Cost 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Rent, Rate and Taxes Printing & Stationery Postage & Telegram Telephone Fax & Telex Travelling & Conveyance Subscriptions, Books & Periodicals Entertainment Vehicle Running Expenses Security Fire Fighting Other Expenses Cost per Ton of Sugar Previous Year Amount Rs. Cost per Ton of Sugar
138
12.
Total
Allocated to i)White bagged sugar ii) Electric Power House iii)Steam Generation iv) Others: a) Staff colony b) Office building etc Total as per item 12 above
Note:
1. Bases of allocation should be disclosed. 2. Expenses are illustrative only. Companies should provide in detail all items of general overheads.

Annexure 10
STATEMENT SHOWING ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED _________
Current Year S.No Particulars Amount Rs Cost per Ton of Sugar Previous Year Amount Rs. Cost per Ton of Sugar
139
1.
Total Sugar Sold (M-Tons)
2.
Cost
Salaries, Wages & Benefits (Annex 6)
Rent, Rate and Taxes Insurance Water, Gas & Electricity Printing & Stationery Postage & Telegram Telephone Fax & Telex Repair & Maintenance Travelling & Conveyance Subscriptions, Books & Periodicals Entertainment Advertising Legal & Professional Exp Auditors remuneration Vehicle Running Expenses Charity & Donation Others
Total

Annexure 11
140
STATEMENT SHOWING SELLING EXPENSES

DURING THE YEAR ENDED _________
S.No. Particulars Current Year Amount Cost per Rs Ton of Sugar Previous Year Amount Cost per Ton Rs. of Sugar
1. 2. -
Total Sugar Sold (M-Tons) Cost Salaries, Wages & Benefits (Annex 6) Travelling & Conveyance Commission Freight Outwards Stacking/Restacking Loading/Unloading Export Expenses Vehicle Running Expenses Advertising for Sales Promotion Other Expenses
Total

A
Analyzing
141
Glossary of Technical Terms

To determine or examine the composition of an item, account or amount, usually by reference to its historical origin; particularly (auditing) to review and set forth in a working paper the details or classified summary of items in an account, obtained or substantiated, where necessary, by reference to sources and accompanied by explanations of major items and by cross references to related accounts. A process which consists of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts. Minerals containing substantial amounts of clay-like components. These are finegrained (less than 2 um) aluminosilicates and more particularly clay minerals such as kaolinite and chlorite. Clays and Shales are thus predominantly argillaceous.
Analytical Procedures
Argillaceous Minerals
B
Bagasse Bauxite Cane residue leaving mills after extraction of juice. Aluminum Ore containing minerals (such as gibbsite, boehmite and Diaspore) and ironoxides (goethite and hematite), the clay mineral (kaolinite) and small amounts of anatase. It was named after the village Les Baux-de-Provence in Southern France, where it was first discovered in 1821 by geologist Pierre Berthier. A hard coal containing a tar-like substance called Bitumen. It is of higher quality than lignite coal but of poorer quality than anthracite coal. It is an organic sedimentary rock formed by digenetic and sub-metamorphic compression of peat bog material. Such a combination or association in which separate constituents or the line of demarcation cannot be distinguished. A closed vessel in which water or other fluid is heated. The heated or vaporized fluid exits the boiler for use in various processes or heating applications. That part of the sugar mill in which the processes of production of sugar from raw juice are carried out. It is also referred to as the back-end or raw house. A secondary product obtained during the course of manufacture, having a relatively small value as compared with that of the main product or products. The cost of a byproduct is commonly regarded as indeterminable.
Bituminous Coal
Blending Boiler Boiling house Byproduct
C
Calcareous Calcination
It refers to a sediment, sedimentary rock, or soil type which is formed from or contains a high proportion of calcium carbonate in the form of calcite or aragonite. Calcination (also referred to as Calcining) is a thermal treatment process applied to ores and other solid materials in order to bring about a thermal decomposition, phase transition, or removal of a volatile fraction. The calcination process normally takes place at temperatures below the melting point of the product materials. Calcination is to be distinguished from roasting, in which more complex gas-solid reactions take place between the furnace atmosphere and the solids, whereas calcination takes place in absence of air. Process involving introduction of carbon dioxide gas into limed juice or syrup to remove color and non-sugar solids. Centrifuge used to separate sugar from mother liquor. Apparatus for separation by sedimentation of suspended solids from turbid sugar solution.
Carbonation Centrifugal Clarifier

Clarification Classification process Clinker Any process (typically an industrial process) that removes impurities. The two sulphitation and carbonation processes are termed as classification process. In manufacturing Portland cement, clinker is the solid material produced by cement kiln stage that has sintered into lumps or nodules, typically of diameter 3-25 mm. To establish the correspondence or similarity of differently located items. A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. Substantiation of the existence and sometimes the condition and value of a claim against another, or of an asset in the possession or control of another, or of the existence and amount of a liability. A confirmation usually takes the form of a written request and acknowledgment, but it may also be obtained orally, or through observation, as by the inspection of a passbook containing entries for deposits, or of records reflecting a certain transaction. That branch of accounting dealing with classification, recording, allocation, summarization, and reporting of current and prospective costs. Included in the field of cost accounting are the design and operation of cost systems and procedures; the determination of costs by departments, functions, responsibilities, activities, products, territories, periods and other units, and of forecasted future costs and standard of desired costs, as well as historical costs; the comparison of costs of different periods, of actual with estimated, budgeted, or standard costs, and of alternative costs; the presentation and interpretation of cost data as an aid to management in controlling current and future operations. A system of accounts, often subsidiary to the general ledger, by means of which the cost of products, processes, or services are determined. Cost systems are usually regarded as falling into two broad classes: job-order and process-cost systems; estimated or standard costs may be a feature of either. Any unit of activity into which a manufacturing plant or other operating organization is divided for purposes of cost assignment and allocation. For each such center, accounts are maintained containing direct costs for which the centers head is accountable. The employment of management devices in the performance of any necessary operation so that pre-established objectives of quality, quantity, and time may be attained at the lowest possible outlay for goods and services. Such devices include a carefully prepared and reviewed bill of materials; instructions; standards of performance; competent supervision; cost limits on items and operations; and studies, interim reports, and decisions based on these reports. The concept of an item of cost or a group of costs passing through two or more stages within an economic unit; as, the movement of raw material costs from requisition to purchase, receipt, stores, production, sales, and collection. Expense incurred in and allocated to a manufacturing operation; the cost of materials, labor and often overhead charged to work in process. Ledgers, supporting and supported by records, schedules, reports, invoices, vouchers, and other documents evidencing the cost of a project, job, production center, process, operation, product, or service. A crystal is a solid in which the constituent atoms, molecules or ions are packed in a regularly ordered, repeating pattern extending in all three spatial dimensions. A state consisting of or containing or of the nature of crystals. Nucleation and growth of crystals.
142
Comparing Confidentiality
Confirming
Cost Accounting
Cost Accounting System
Cost Center
Cost Control
Cost Flow
Cost of Production Cost Records
Crystal Crystallize Crystallization

D
Deodorizer An equipment for deodorizing, the final stage in vegetable oil refining. Deodorizing removes odoriferous material, free fatty acids and other undesired minor components to produce bland oil with a good shelf life. A process that uses high vacuum and superhead steam in the washing of fats and oils. Deodorization removes from fats and oils materials originally present or introduced during previous processing that would contribute undesirable flavors and odors to the finished products. Modern Kiln technology that accepts the raw materials as a fine dry powder, ready for calcining and clinkerising.
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Deodorization
Dry Process
E
Examining To probe records, or inspect securities or other documents, review procedures, and questions persons, all for the purpose of arriving at an opinion of accuracy, propriety, sufficiency and the like.
F
Fatty Acids
A carboxylic acid, often with a long unbranched aliphatic tail (chain), which is either saturated or unsaturated. Carboxylic acids as short as butyric acid (4 carbon atoms) are considered to be fatty acids, whereas fatty acids derived from natural fats and oils may have at least 8 carbon atoms, e.g. caprylic acid (octanoic acid). Most of the natural fatty acids have an even number of carbon atoms, because their biosynthesis involves acetyl-CoA, a coenzyme carrying a two-carbon atom group. Grinding balls that are available in different sizes and hardness.
Forged Steel Balls
H
Hydrogenation
I
Independence
A class of chemical reactions which result in an addition of hydrogen usually to unsaturated organic compounds.
Professional accountants in public practice when undertaking a reporting assignment should be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity, objectivity and independence. Inspection consists of examining records, documents or tangible assets. A professional accountant should be straightforward and honest in performing professional services. All the policies and procedures (internal controls) adopted by the management of an entity to assist in achieving managements objective of ensuring, as far as practicable, the orderly and efficient conduct of its business, including adherence to management policies, the safeguarding of assets, prevention and detection of fraud and error, accuracy and completeness of accounting records and timely preparation of reliable financial information.
Inspection Integrity Internal Control System
K
Kiln
Thermally insulated chambers or ovens in which controlled temperature regimes are produced. They are used to harden, burn or dry materials.

L
Laterite A surface formation in hot and wet tropical areas, which is enriched in iron and aluminum and developed by intensive and long lasting weathering of underlying parent rock. Nearly all rocks can be deeply decomposed by high rainfall and elevated temperatures. The percolating rainwater causes dissolution of primary rock minerals and decrease of easily soluble elements e.g. sodium, potassium, calcium, magnesium and silicon. This gives rise to a residual concentration of more insoluble elements, predominantly iron and aluminum. A sedimentary rock composed largely of mineral calcite. Limestone often contains variable amounts of silica in the form of chert or flint, as well as varying amounts of clay, silt and sand as disseminations, nodules or layers within the rock.
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Limestone
M
Magma Massecuite Molasses
A mixture of crystals and liquid (water, clarified juice, syrup or molasses) produced by mingling. A mixture of crystals and mother liquor resulting from crystallization process of sugar refining. Massecuites are classified according to purity as A, B or C massecuites. The mother liquor separated from crystals by centrifuging. A, B or C molasses is derived from the corresponding massecuites. C molasses is also referred to as final molasses. An arrangement of rolling mills, in direct line, allowing the metal to pass from one set of rolls into the next set.
Milling tandem
N
Neutralization
O
Objectivity
A chemical reaction in which a water solution of acid is mixed with a water solution of base to form a salt and water. This reaction is complete only if the resulting solution has neither acidic nor basic properties. Such a solution is called a neutral solution. Complete neutralization can take place when a strong acid, such as hydrochloric acid, is mixed with a strong base, such as sodium hydroxide. Strong acids and bases completely break up or dissociate into their constituent ions when dissolved in water.
P
Packing Perforated Plate
A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity.
The processing and packaging of manufactured products, especially food products. A flat plate with series of holes used to control fluid distribution, as in a perforatedplate (distillation) column. A binding agent of present-day concrete. It is a finely ground powder made by burning and grinding a limestone mixed with clay or shale. Its inventor, Joseph Aspdin (1799 1855), patented the process in 1824, naming the material for its resemblance to the limestone of the Isle of Portland, England. The cement combines chemically with the water it is mixed with, then hardens and strengthens. A person who does a job that needs special training and a high level of education. A professional accountant must act in a manner consistent with the good reputation of the profession and refrain from any conduct, which might bring discredit to the Profession. A professional accountant must perform professional services with due care, diligence competence and has a continuity duty to maintain professional knowledge and skill at a
Portland Cement
Professional Professional Behavior Professional Competence

And Due Care level required to ensure that a client or employer receives the advantage of competent professional service based on current developments in practice, legislation and techniques. The selection of ingredients for a mixture, to make the most economical use of available materials to produce the required properties. A process which reduces a material to powder or dust, usually by crushing, pounding or grinding.
145
Proportioning Pulverizing
Q
Quarry
R
RCC Silo Reconciling
Quarry is Extraction pits, worked exposures, mines, and other kinds of working areas with natural raw materials such as stone, flint, or metal ores.
Reinforced Cement Concrete Silo is tall, enclosed structure used primarily to store. It is usually cylindrical in shape. The determination of the items necessary to bring the balances of two or more related accounts or statements into agreement.
S
Shale
A class of fine-grained clastic sedimentary rocks with a mean grain size of less than 0.0625 mm including siltstone, mudstone, and clay stone. One-half to two-thirds of all sedimentary rocks are shales. Silo is tall, enclosed structure, usually cylindrical in shape, used primarily to store. A process of forming objects from a metal powder by heating the powder at a temperature below its melting point. A thin mixture of insoluble material floating in liquid. Adding of sulfur dioxide or derivatives to process streams in a sugar industry. This is done for one of three reasons i.e. pH Control, Biocide or Color blocking.
Silo Sintering Slurry Sulphitation
T
Technical Standards Testing Tracing
A professional accountant should carry out professional services in accordance with the relevant technical and professional standards. A specified procedure or set of procedures, including rules for assembling evidence, interpretation, and significance for accepting or rejecting hypotheses. To ascertain whether an item has been disposed of in accordance with source indications.
V
Verifying Vouching To check that something is true or accurate. Preparation under a voucher system of invoices or other statements of liability for entry, distribution and payment.
W
Wet process Kiln technology that requires the raw materials to be fed to the kiln process as a slurry for calcining and clinkerising.
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Comments are requested by 31st March 2008

COST AUDIT HANDBOOK [Third Revised]

REQUEST FOR COMMENTS

EXPLANATORY MEMORANDUM Introduction

Request for Commentators

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EXPOSURE DRAFT OF THIRD REVISED

COST AUDIT HANDBOOK

Institute of Cost and Management Accountants of Pakistan

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COST AUDIT HANDBOOK

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GLOSSARY OF TECHNICAL TERMS

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Cost Accounting Records Orders:

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(iv) (v) (vi)

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Principles of Cost Audit

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Planning Cost Audit

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Cost Audit Programme:

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Identify Keep Notes

Obtain copies. Keep Notes.

Obtain detailed organisation chart showing functional relationships.

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Keep Notes Identify

Obtain a Chart. Keep notes.

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Name & Date -----------------Cost Auditor

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Prepared by: Name & Date

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PROCESS FLOW CHART - VANASPATI BLEACHING CHEMICALS

HDROGENATED OIL TANKS

BOX TO BE FILLED TO EXPLAIN THE PROCESS

OILS BLENDING TANKS

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Dated: This __, day of _, 200