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Definition of cost audit

According to the Institute of Cost and Management Accountants of England, Cost Audit is defined as, the verification of Cost Accounts and a check on the adherence to the Cost Accounting plan. It is a systematic examination of the books and records of a business in order to ascertain or verify and report upon the facts regarding its financial operations and results thereof.

Functions of cost audit


0 Verifies whether the cost accounts have been

correctly maintained and prepared according to the system of cost accounting employed in the business concern 0 It serves both cost ascertainment and cost control functions 0 It ensures that the costing plan laid out is functioning properly 0 It detects and prevents errors and frauds in the preparation of cost records

Purpose of cost audit


0 Protective purpose : It examines that there is no

undue wastage or losses and the costing system brings out the correct and realistic cost of production or processing. 0 Constructive purpose: It provides management with information useful in regulating production, choosing economical methods of operation, reducing operations costs and reformulating plans etc

Usefulness of cost audit


Usefulness to the Management : 0 The management will get reliable data for its day to day operations like price fixing , control, decision making, etc. 0 A close and continuous check on all wastages will be kept through a proper system of reporting to the management. 0 Inefficiencies in the working of the company will be brought to the notice of the management to take corrective action.

0 Management by exception becomes possible

through allocation of responsibilities to individual managers. 0 The system of budgetary control and standard costing will be greatly facilitated. 0 A reliable check in the valuation of closing stock and work-in-progress can be established.

Usefulness to the Society : 0 Cost audit is often introduced for the purpose of fixation of price. The prices so fixed are based on the correct costing data and so the consumers are saved from exploitation. 0 Price increase by the industry is not allowed without proper justification as to increase in cost of production, consumers are saved from unreasonable price hike. 0 Cost Audit is also useful for the purpose of Cost Control; Cost reduction and proper utilization of scarce resources

Usefulness to Shareholders : 0 Cost audit ensures that proper records are kept as to purchases and utilisation of material and expenses incurred on wages, overheads, etc. 0 It also ensures that the unit has been run economically and efficiently. 0 It also makes sure that the valuation of closing stocks and work-in-progress is on a fair basis. Thus, the shareholders are assured of a fair return on their investment.

Usefulness to the Government : 0 Where the government enters into a cost plus contract, cost audit helps the government to fix the price of the contract. 0 Cost audit helps the fixation of selling prices of essential commodities and thus undue profiteering is checked. 0 Cost audit enables the government to focus its attention on inefficient units.

0 Cost audit enables the government to decide in favors

of giving protection to certain industries. 0 Cost audit facilitates settlement of trade disputes brought to the government. 0 Since cost audit ensures efficient running of the business and correct and accurate use of cost data, a healthy competition is generated among the various units in an industry. This imposes an automatic check on inflation.

Cost Audit Techniques


0 Vouching

0 Checking and ticking


0 Test checking 0 Working papers 0 Audit notes 0 Questionnaire

Cost audit programme


0 Record of material

0 Labor records
0 Record of over head charges 0 Depreciation 0 Work in progress report 0 Incomplete records